The Bankruptcy Alphabet: “C” is for “Cancellation of Debt Income”
April 14, 2012
Individuals in financial trouble are often surprised at tax time when they receive a 1099-C statement from a creditor. Many times these statements come from credit card companies where individuals have made a settlement of the debt for less than the full account balance. In other instances the creditor has simply charged off a defaulted debt.
The amount of unpaid debt was canceled by the creditor. This canceled debt is often known as “cancellation of debt” (COD) income. The creditor will then report this canceled debt to the Internal Revenue Service, and the individual will then be taxed on that canceled debt as if it were income.
If you receive a 1099-C, don’t panic. All is not lost. If you meet certain exceptions you will not have to pay the tax on this “income”. One of those exceptions is if the debt was discharged in a bankruptcy filing. If you meet one of the exceptions, Form 982 must be filed with your tax return so that you will not have to pay tax on the canceled debt.
If your tax preparer doesn’t know about Form 982, find another tax preparer.