If I file bankruptcy now can these 1099-C be taken care of or do I have to show them as income?
Full Question:
Answer:
If you receive a 1099-C form from a creditor, you must report the amount of the cancelled debt as income to the IRS even though you have not actually received the money. (The amount shown in Box 2 of the 1099-C form is the amount that must be reported as income.)
The IRS recognizes five situations where a cancelled debt does not have to be reported as income.
1. Bankruptcy – the debt was already discharged through a bankruptcy proceeding.
2. Insolvency – your total debts exceed your total assets at the time your debt was settled or deemed non-collectable.
3. Indebtedness is due to a qualified farm expense.
4. Indebtedness is due to certain real property business losses.
5. Discharge of your debt was treated as a gift. (Extremely rare)
If you are insolvent you need to explain this to the IRS in one of two ways. 1) By filling out IRS Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness or 2) Attaching a detailed letter to your tax return explaining the calculation of your total debts and assets.
You are considered to be insolvent if your total liabilities (debts) are greater than your total assets. For example, if your total liabilities are $10,000 and your total assets at the time are $6,000 you are insolvent in the amount of $4,000. To determine the value of your assets use the fair market value rather than what you paid for them or what you think they are worth.
Generally, bankruptcy discharge applies to debts, not to income. A discharge in bankruptcy does not erase the reporting of income required unless the underlying debt was already discharged in bankruptcy. If the credit card debt was discharged in bankruptcy, then the 1099 c income doesn't need to be reported as income.
