Often times when a creditor charges off a debt, they can send you a 1099C for the canceled debt. When prepping your tax return this can increase your income. There are two exceptions to the canceled debt that can assist many Debtors who are in financial straights: bankruptcy and insolvency.
Bankruptcy
Debt that is discharged in a bankruptcy case is not included as income on your tax return. This is true for Chapters 7, 11, 12, and 13. The exception only applies to debt that is successfully discharged at the completion of a case. Therefore if you were in a chapter 13 case that was dismissed before the discharge it the exception won’t apply.
If you have filed for bankruptcy and received a discharge you will typically not receive a 1099C from your creditors. However if you do the income should be reported on a Form f982 and attached to your federal income tax return.
Insolvency
You do not need to include any canceled debt if you were insolvent immediately before the cancellation. To determine insolvency can be a difficult analysis however in it’s most basic sense it is where your total debt is greater then the total fair market value of all of your assets. Your assets are everything you own. This includes property that has liens against it and property that is normally exempt. For more information about insolvency you can review the IRS publication p4681.
If you have issues with too much debt and you are looking for your debt relief options contact the experienced attorneys at Fears Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.