In January and February of each year, employers, lenders and businesses send out tax forms to people that need them to file their tax returns. You might receive receive a W-2 form showing how much money you earned from a job or maybe a 1098 form sent by your mortgage lender to show how much interest you paid. Your creditors might send you a 1099 form if you filed for bankruptcy, but this is not the end of the world.
This happened to a client recently. They filed for bankruptcy which included a significant credit card debt owed to Citibank. Citibank sent them a 1099 form and they thought Citibank was treating the debt as still active. They were also concerned that the 1099 for the cancellation of the debt made it look like they had received taxable income.
Even though the debt forgiveness came from the bankruptcy and is therefor not taxable, Citibank must still issue the 1099 in order to be able to write this off as a bad debt. In fact, debtors will probably receive several 1099 forms from their creditors. Debtors that receive 1099 forms should inform their tax professional that they need to attach IRS Form 982 to their tax return. Form 982 allows a tax payer to tell the IRS that the debt cancellation income is not taxable. Failure to tell your CPA or other tax professional about your bankruptcy could cause you to miss out on the valuable tax benefit provided by your bankruptcy discharge.
You probably hired an attorney to help you with your bankruptcy. Now you should hire a CPA or other qualified tax professional to make sure you get the full tax benefits of your bankruptcy discharge.
Image credit: Philip Taylor PT