Let’s say you’ve just checked the mail and found a form from a creditor that you don’t recognize. You open up the envelope and discover that it’s a 1099-c tax form. What exactly is it? Why were you sent this form? What does this form mean for your debts and filing taxes after bankruptcy discharge? Does bankruptcy clear tax debt? Situations like these can be confusing and stressful. That’s why it’s important to consult with an experienced bankruptcy attorney to better understand everything.
At O’Bryan Law Offices, Louisville’s top bankruptcy law firm, we focus solely on helping people all across the state file for bankruptcy, and get their life back on track afterward. A person’s finances are extremely important and personal. That’s why we dedicate our practice to helping people with problems related to them. If you received a 1099-c tax form recently, and you’re concerned about filing taxes after bankruptcy discharge, you need the O’Bryan Law Offices to help you through it. For a free consultation from a Louisville bankruptcy attorney, call 502-400-4020 today.
For a better understanding of these forms, we also recommend reading our blog about the differences between a bankruptcy dismissal vs discharge.
What Is a 1099-c Tax Form?
Receiving an unknown tax form in the mail might seem scary at first, but 1099-c forms are harmless. Many people never see these forms in their lives, but a large number of people do. More or less, these forms indicate a cancellation of your debt. The IRS requires these forms when they consider your forgiven debt to be a source of income. Here’s an example.
- You borrow $6,000 in the form of a personal loan. You only pay back $3,000, which is half.
- After paying part of the debt back, you still owe $3,000. However, the debt gets forgiven or cancelled.
- Because you still benefited from the $3,000 you did not pay back, the IRS considers this to be income for you.
Why Was I Sent a 1099-c Cancellation of Debt?
People receive these forms when specific situations arise. While not every cancellation of debt involves someone receiving a 1099-c form, some people still get them. If you get one of these forms in the mail, a debt cancellation occurred for you at some point during the tax year. One of the boxes (Box 6) will include a code to determine why exactly you got the form in the mail. We recommend visiting the IRS page regarding debt cancellation to further understand the process. Below, we list the potential codes found in Box 6, as well as their meanings.
- A — Title 11 Bankruptcy
- B — Some other judicial debt relief
- C — Expiration of deficiency or statute of limitations
- D — Foreclosure
- E — Probate debt relief, or a similar proceeding
- F — Agreement
- G — Policy or decision to cease debt collection
- H — Other discharge before identifiable event
Can I Make Installment Payments on My Tax Debt?
Absolutely. If paying off your tax debts is easier or more doable in the form of an installment plan, by all means pursue this approach. These installment agreements, or IAs, make it easier to pay off your tax debts. If you have less than $50,000 in debt, all you have to do is ask, and the IRS will help set up your payment plan. If you have more than $50,000 in debt, the IRS will ask for financial information before negotiating on a plan with you. However, keep in mind that you must be current on this year’s tax returns in order to benefit from the IA option.
When Is a Canceled Debt Excluded from Taxable Income?
Receiving a 1099-c form indicates that you might have an exception for the rule that canceled debt is considered taxable income. In some situations, it is possible to avoid taxation on your cancelled debt. Below, we list common exceptions to cancellation of debt as taxable income.
- Canceled debt as a gift, bequest, device, or inheritance.
- Student loans cancelled under the provision that you work for a specified period of time for a certain profession.
- Other education loan repayment or forgiveness programs to provide health services in certain areas.
- Deductible amounts of canceled debt if you paid for them.
- Purchase price reduction given by the seller to the buyer of the property.
- Pay-for-Performance Success Payments which reduce the principal balance of your home mortgage under the Home Affordable Modification Program.
- Student loans discharged due to death or permanent disability of the student.
Does Bankruptcy Affect Tax Return?
While filing for bankruptcy, your tax refund for that tax year, whether you received it or not, is considered an asset. Depending on how you prepared for your bankruptcy, you may or may not be able to protect your tax returns. It is possible to protect your tax return with a bankruptcy exemption. Protections vary in terms of type and amount from state to state, so consult with your Kentucky bankruptcy attorney before proceeding. Your ability to keep a tax return also depends on which type of bankruptcy you file for.
- If you filed for Chapter 7 Bankruptcy in Kentucky, take these steps to protect your returns. If possible, we recommend filing for bankruptcy after you receive and spend your returns. Do not use your returns to purchase new assets. You could also use the returns to pay your bankruptcy attorney. Additionally, you can choose to either adjust your withholdings early in the year or contribute more to your retirement fund.
- If you filed for Chapter 13 Bankruptcy in Kentucky, use the steps we discussed for a Chapter 7 filing. However, things change if your payment plan involves less than 100% in creditor payments. In this case, your creditors may decide to keep your tax refund to make up the difference. Many times, it is not possible to completely protect your refund from creditors. However, adjusting your withholdings limits how much your creditors can take.
If You Need Help Filing Taxes After Bankruptcy Discharge
While filing taxes after bankruptcy discharge, your finances might feel more complicated than ever before. That’s why our bankruptcy attorneys at O’Bryan Law Offices are here to help. We have even written a blog about filling out certain tax forms, titled TIN vs EIN. For almost 20 years, we’ve provided bankruptcy assistance to thousands of people across Kentucky, and we’re not stopping now. To set up your free consultation with a qualified bankruptcy attorney, call 502-400-4020 today.