After our chapter 7 bankruptcy was discharged, we ended up in foreclosure. Then, much to our surprise, the bank sent us a letter forgiving our second mortgage of $89,000. We just received a 1099-C tax statement for that amount. The statement actually states "Borrower was personally liable for repayment of debt." However, we did not sign to recommit on either of our mortgages during bankruptcy. How is it that we, via bankruptcy, are not responsible for repayment of this debt, and at the same time, the bank refers to us as personally liable for repayment of the debt? Are we actually expected to pay tax on the amount?
You need to take the 1099-C to your CPA or accountant who will know how to handle it with the IRS. There is a Form 982 which he/she will prepare that advises the IRS that you should not have to pay any income taxes on the "forgiven debt" because you received a discharge in bankruptcy. Bankruptcy is one of the exceptions to people having to pay income tax when a creditor forgives , settles, or writes off a person's debt. Remember that the IRS will receive the 1099, so do not ignore it.
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8 lawyers agree
Chapter 11 Bankruptcy Attorney
I agree with my colleague. The banks have been doing this lately.
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3 lawyers agree
Family Law Attorney
Take this 1099C to a tax preparer ASAP along with your bankruptcy petition and your Discharge notice. If you did NOT reaffirm the debt, it was wiped out in the BK. Good luck.
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2 lawyers agree
Can a bank issue a 1099-C after bankruptcy....
1. Is it legal, yes.
2. Is it an error, no.
3. is it required, no.
If anyone actually reads the instructions and IRS regulations regarding 1099-C's, you will learn that a lender is not "required" to issue a 1099-C on debt discharged in bankruptcy, but it is not forbidden from doing so. As such, it is NOT an error.
A 1099-C is merely a reporting document. All it does is tell the IRS that a potentially taxable event occured. If you recieve a 1099-C, and assuming the debt was discharged in bankruptcy, the debter need only file IRS Form 982, check box 1(a), write the amount in box 2, and bam, no tax liability on discharged debt.
1 lawyer agrees