When a creditor has a debt discharged through bankruptcy, they will often try to claim a tax break on that discharged debt. In order to do so, they need to lodge a tax document known as a Form 1099. For debt forgiveness, it’s a Form 1099-C. However, technically speaking, the debt has not been forgiven. It has been discharged, or cancelled, by the bankruptcy court.

Under normal circumstances, any debt that has been forgiven is taxable as income. The theory is, if you have borrowed money which you cannot repay, that borrowed money is income, and as such, subject to tax. Under bankruptcy and taxation law, any debt discharged through bankruptcy is exempt from this tax obligation. When filing a tax return, you should check to see if you are required to fill out a form 982 – this effectively reduces your income by the amount on the Form 1099-C.

You should also advise your attorney (if you engaged a bankruptcy attorney) as the creditor may have breached guidelines related to the discharge of debt in bankruptcy. There is a strong legal argument that suggests that the issue of a form 1099-C is a violation of the discharge injunction. Your attorney can certainly advise you in those matters.

If you receive the 1099-C during the bankruptcy process, this is generally considered to be a violation of the automatic stay. You should advise your attorney and the bankruptcy trustee. The trustee will determine whether or not the creditor has breached the conditions of the stay, and if so, take whatever action is appropriate. The bottom line, when it comes to bankruptcy and a Form 1099-C, is that you are not obliged to pay taxes on those forgiven debts.

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