According to the IRS, if a creditor writes off a debt that you owe, or if a debt with a creditor is settled for less than the full amount, you could owe money to the IRS. This includes debt from credit cards, car repossessions, foreclosures, etc. Creditors that forgive $600 or more are required to file Form 1099-C with the IRS. The IRS treats the forgiven debt as income, and therefore you may owe income taxes.
However, it is my understanding that when a debt has been discharged in bankruptcy that debt does not need to be included as income for tax purposes.
If you file an IRS Form 982 to counteract this, you may be able to avoid payment by proving you’re insolvent at the time the debt was forgiven. It is my understanding that the IRS has specific guidelines and a Worksheet used to define "insolvency".
You can prove your insolvency by filing IRS Form 982 and attaching it to your federal income tax return to combat Form 1099-C. This shows that your debt was canceled during a bankruptcy case and is now excluded from taxable income.
What if the debt is in an active Chapter 13 and the 1099 C was filed prior to Discharge?
You may want to check Line 1a on Form 982—but include an Attachment to the Form 982 that you file with the IRS that states that the debt has not yet been discharged—but it is included in a current Chapter 13 case. It would also be recommended to provide the IRS with your current case number. If you provide the IRS with ALL the information, I assume that they will notify you if you are mistaken.
**** Note: You should seek the advice of an accountant, as this is not legal advice regarding taxes.
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