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Dealing with Taxes after Bankruptcy

Last year, your house was foreclosed on and you filed for bankruptcy under Chapter 7. Now you are gathering your tax documents to prepare this year’s income tax return. Amongst those documents you see that you have a 1099 from the bank who held the mortgage on your house. Does this mean you will owe taxes as a result of the foreclosure on your home? Probably not.

You have likely received either a 1099-A or a 1099-C. Form 1099-A is an informational return that the mortgage company is required to file with the IRS to show that they acquired your property. This form tells the IRS the principal outstanding on the loan and the amount for which the lender acquired the property back. This may be either a complete or partial satisfaction of the debt you owed to the bank. The amount for which the lender acquired the property back is treated as a sale and it is possible that may trigger a capital gains tax (depending on your basis in the property and the amount for which the property was “sold”) but it will not result in any ordinary income taxes being due.

When a 1099-C is issued, this means a portion of your debt has been cancelled and is taxable income unless it can be properly excluded from your gross income. To exclude the cancelled debt income from your taxable income, you must simply file Form 982 with the IRS indicating that the debt was discharged through bankruptcy. This form should be filed along with your Form 1040 (your regular federal tax return document) at the time you are filing your taxes for the year. If you have mistakenly received Form 1099-C after your taxes have been filed, you should also file Form 982 checking box 1a, Title 11 indicating bankruptcy and submit it with your bankruptcy discharge. If your home was foreclosed on prior to filing for bankruptcy, you will indicate on line 1b that you were insolvent at the time the debt was discharged.

As always, feel free to contact my bankruptcy law firm and/or your accountant before filing any documents with the IRS.

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**Please note that the information provided here is intended only for general educational purposes. The law changes frequently and must be updated. This information is not intended to be a substitute for legal advice from an attorney hired to advise you on your particular situation and circumstances.

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