Recently as we get closer to the tax deadline, several clients have approached me after receiving 1099’s after filing bankruptcy and having their debts discharged. Obviously they were concerned about the tax consequences. After hearing their stress on the phone or in person, I told them to relax and gave them IRS Form 982.

Why did they receive the 1099? Good question – whenever debt is forgiven, it is considered income for purposes of taxes. Here’s an example: Mr. Smith has a $10,000 debt, he files bankruptcy and the $10,000 debt is forgiven, he is now $10,000 better off than he was before he filed bankruptcy, so the IRS considers this to be income. Doesn’t sound right does it? You don’t actually get the $10,000 – so why should you be taxed on it? Well, fortunately the IRS agrees with you.

IRS Form 982 - Reduction of Tax Attributes Due to Discharge of Indebtedness, applies to many situations where your debt may be reduced by a discharge, however you should talk with your CPA or Tax Specialist before filing this form with your taxes.

So, if you find yourself in the situation where you received a 1099 after a bankruptcy, make sure that you get the proper form and talk with your accountant.

*- This information is purely for educational purposes only and is accurate at the time that it is written, but it could change so talk with a professional before taking any action based on this article. Also, this article or any other information on this website is purely for educational or commercial purposes and does not create an attorney client relationship in any way. The Shepard Law Office PLC is a debt relief agency in Michigan helping people file bankruptcy under the bankruptcy code. If you are looking for a Michigan bankruptcy lawyer, this is the right place for you.