You could argue that the debt wasn't forgiven by the lender, but was discharged in the bankruptcy. Lenders often send out 1099C forms after a bankruptcy when they haven't forgiven the debt at all but instead had no choice about efforts to collect the debt.
I don't know if this strategy will be effective or not, but hope this perspective helps!
If the creditor filed a 1099-C under your social security number with IRS, they have made a statement to the IRS that they have forgiven debt you would otherwise owe them because you cosigned. By co-signing, you guaranteed her debt on that car loan and her bankruptcy discharge will not wipe out your obligation to the bank for that loan as co-signer. However, it appears that the bank (perhaps by mistake) has written you off and reported the debt as forgiven to the IRS.
If anything, this could be construed as good news, because it would be better to owe the IRS a small fraction of the total balance than to be on the hook with the car lender for the full deficiency amount that you guaranteed. Furthermore, you could always potentially qualify for an exemption from that tax liability if you could show the IRS that you were insolvent at the time of the debt's cancellation. And, if your ex-wife filed a Chapter 7, it did not necessarily discharge her liability to you under the divorce decree to take responsibility for the car loan if she agreed to the "hold harmless" provision commonly found in Washington State divorce decrees. Thus, you could potentially hold her responsible in court for any amount you had to pay (to the IRS or otherwise) to deal with this debt.
This is a complex issue and I would encourage you to contact a Washington State attorney with experience dealing with bankruptcy and cancellation of debt issues to give you a thorough analysis of your options.
I am an attorney licensed exclusively in the State of Washington. All information provided should never be interpreted as legal advice with respect to any particular situation. Review all information obtained on this website with skepticism and contact an attorney in your state if you have questions about the subjects discussed.
Agreed that if they filed a 1099C against you with the IRS they are saying they are writing off the debt against you because of the bankruptcy. If they do this it can be good news because they are not coming after you for the co-signer liability. The bad news is that it is treated as income by the IRS and you pay income tax on the debt. The only way to avoid this is to be legally insolvent for tax purposes which is a tax question or issue for a CPA or file a bankruptcy to avoid the tax. Likely the best way to deal with this bitter pill is to pay the taxes on the 1099C.
However if the creditor ever comes after you then you have a defense that the debt was charged off by the original creditor. They cannot take a tax deduction and then collect or sell the debt later to another party. You may be able to go after the spouse under the divorce decree for not doing what she was supposed to pursuant to the divorce decree.
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