Each year during income tax season, millions of American taxpayers file 1099-C tax forms with the IRS.  A 1099-C is a form that reports Cancellation Of Debt Income, or CODI.  Anytime a lender cancels more than $600, they are to fill out one of these forms and send copies to the IRS and to the taxpayer.  A few common reasons for filing a 1099-C would include:


– Debt forgiveness through settlement of debt with lender

– Home foreclosure with deficiency

– Short sale of a home

– Debt that has not been paid on in the last thirty-six months, and has not had collections efforts in the previous 12 months.

What does this have to do with bankruptcy?  Personal debts included in bankruptcy settlements do not require taxes to be paid on them.  Also, creditors need not file 1099-C forms for debts discharged in personal bankruptcy settlements either.  In the event they do file a 1099-C, there is a form you can file with your return (form 982) which will exempt the taxpayer from the liability because it was discharged or included in a bankruptcy filing

The most important step is to file a bankruptcy before the tax liability is created.  That means that if you have a recent foreclosure or have a settlement, you are most likely going to receive a tax consequence, however, filing a bankruptcy before the 1099C is issued can preempt  the potential liability.

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