Debt that has been discharged in bankruptcy is not considered income under the internal revenue code. However, forgiven debt that has not been discharged in bankruptcy, is considered income and is taxable as income. That does not mean, however that a creditor who was discharged, will send you a 1099 in error. It happens quite often, and in the event that it does, steps need to be taken in order for the IRS to think you owe them more taxes.
If you get a 1099 for a debt that was discharged in bankruptcy, do not panic. Simply pick up the phone and call the IRS. Believe it or not, they are a little more friendly these days and will work with you to resolve the situation. Most of the time, sending them a copy of the 1099 along with a copy of your bankruptcy discharge will resolve the situation.
You would think that creditors would take steps to avoid this, but it still happens. Many times the creditor does not have a systematic mechanism in place to sort out what is settled debt, and what is discharged debt. At any rate, you are not responsible for taxes on unpaid discharged debt.
If you have questions about this, or are considering filing for bankruptcy, please call us and we will be happy to speak to you about your situation to see if we can help (480-355-1377).
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