4 Steps to Escape Paying Income Tax on Discharged Debt in New York

Receiving a discharge from the bankruptcy court  in New York is the goal of New York bankruptcy petitioners. It should be a relief so that people can continue their lives. Although, occasionally creditors claim the loans you discharged are forgiven instead; that means you’ll have to pay income tax on the forgiveness.

What does this mean from your perspective?

When a creditor forgives a loan with a value greater than $600, it must send you a Form 1099-C for you to send to the IRS. Sometimes the forgiven sums can be quite substantial, such as a deficiency in a mortgage or a large amount of credit card debt. The situations are similar — but discharge and forgiveness aren’t the same thing. Forgiveness is a voluntary act on the creditor’s part.  Discharge means that your debts are no longer enforceable by operation of law. Now the bank is claiming discharged debt is forgiven, and it sent you the 1099-C form to prove it. What do you do?

(1)  Do not panic. This debt has been forgiven, not cancelled.
(2)  Next step, contact the bank to see if it will admit it made a mistake. This may take a while, but sometimes banks can get their acts together.
(3)  Submit IRS Form 982 [http://www.irs.gov/pub/irs-pdf/f982.pdf] with your tax return to the IRS. Form 982 is self-explanatory: “Reduction of Tax Attributes Due to Discharge of Indebtedness.”
(4)  Check box “1A,” fill in the amount that was discharged in “line 2,” and complete the rest of the form as necessary.

These simple steps should clear up the problem.

For more questions about discharged debt, forgiven debt, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA
718-855-6840
http://nybankruptcy.net/

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