When a creditor cancels a debt owed to it in New York or elsewhere, and the debt is greater than $600, then it must send the now-former debtor IRS Form 1099-C. The debtor includes this in his or her income tax filing to demonstrate that the canceled debt is in fact income subject to income tax. Debtors are often surprised to receive these forms and believe it unfair.
Most of the time, people receive 1099-C forms when a bank cancels their mortgage deficiencies after either a short sale or deed-in-lieu of foreclosure agreement. In other circumstances, they’ve settled their debt via a debt management or debt settlement company, and now they must pay income tax on the forgiveness, which can force them into bankruptcy anyway. The one time debtors should not receive these forms is after their debts have been discharged in bankruptcy. In those situations, the debt is not canceled but is rendered unenforceable by court order. That means it’s the bank’s problem, not yours.
There are a few ways people can exempt a forgiven loan from their income taxes. One, if the debt was discharged in bankruptcy, then it is exempt. Two, the form allows people to claim insolvency if their total liabilities (debts) is greater than their assets (income, including the forgiven loan). Three, since 2007, the Mortgage Forgiveness Act allows people whose mortgage debt on their principal residences is restructured or forgiven in foreclosure by a bank to claim an exception. The Turbo Tax explains here.
If your financial situation is dire, particularly if you have an underwater mortgage, or credit problems, it’s best to discuss it with a New York bankruptcy lawyer to sort it out. It’s best to be prepared because receiving a 1099-C can pose challenges.
For more questions about debt forgiveness, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.
