Thursday, April 12, 2012
What do do when creditors send you a 1099 for debts you discharged in bankruptcy
Sometimes when people have debts discharged in bankruptcy, their creditors send them a 1099 showing the discharged debt as income. I have noticed that many accountants do not know that this is NOT income pursuant to federal law. 26 United States Code Section 108(A) (1) excludes from income debts that are discharged by bankruptcy. It also excludes debts that were forgiven by the creditors, in whole or in part, to the extent the person was insolvent. I constantly see clients with tax returns showing large amounts owed to the IRS or Virginia Department of Taxation after a bankrutpcy discharge for "forgiven debts." These are not forgiven debts. They are discharged debts, and they are NOT TAXABLE. If you have any questions about whether or not your should pay taxes on these kind of debts, ask a bankruptcy attorney, not an accountant. Apparently, many of them are not aware of the law and give incorrect advice.