Let’s say that last year you borrowed $15,000 in unsecured income and then later in the year declared bankruptcy. As a result of declaring bankruptcy, your loan was cancelled. If there was still a balance on that loan when it was cancelled totaling more than $600, the IRS sees this as taxable income because you basically received “free money” at that point since you aren’t paying it back. Therefore, you will most likely receive a 1099-C form.
A 1099-C form is a cancellation of debt form for debtors who cancelled $600 or more of a debt you owed. So, do you have to pay the 1009-C? Maybe, but it depends on the circumstances that led to the cancellation of your loan.
According to the Turbo Tax website, “If your debt was discharged in a Title 11 bankruptcy proceeding, such as a Chapter 7 or Chapter 13 case, you’re not responsible for taxes on that debt.”
In other words, if you filed for Chapter 7 or Chapter 13 bankruptcy and received a 1099-C form for any debts related to those filings, you do not have to pay this tax bill.
What if the 1099-C was in relation to a mortgage? You may be excluded from this tax as well under the Mortgage Forgiveness Debt Relief Act of 2007. According to the Turbo Tax website, “For calendar years 2007 through 2013, you could exclude up to $2 million in forgiven mortgage debt if you were married and filing jointly — up to $1 million for other filing statuses. This exclusion applied to mortgage debt forgiven through a mortgage restructuring or in connection with a foreclosure.”
You will need supporting documentation to prove you are not required to pay these tax bills. Your best bet is to discuss what proof you need with a tax advisor or your CPA.
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