1099 Forms and Bankruptcy

1099 FORMS AND FILING FOR BANKRUPTCY

With 2013 behind us, many people are starting to think about filing taxes for the 2013 tax year. In connection with tax season, our office has noticed a great increase in the number of 1099 forms arriving from mortgage lenders. These forms can have no tax effect or can dramatically alter a tax obligation for an individual or family. First, you need to understand the 2 main types of 1099 forms. There is a 1099-A and a 1099-C as explained below.

If you borrow money from a lender to purchase property, the lender may require the loan to be secured by the purchased property. If the property is sold in a foreclosure or you abandon the property, you may be required to treat the transfer or the abandonment as a sale of the property. If the lender forecloses on the property or has reason to know that you abandoned, or permanently discarded from use, the secured property, the lender should send you a Form 1099-A, Acquisition or Abandonment of Secured Property. The filing of a bankruptcy and surrender of the property after a Chapter 7 or Chapter 13 filing will often trigger a 1099-A filing.

The 1099-C is strictly income related. When you borrow money, you are not required to include the loan proceeds in gross income because you have an obligation to repay the lender later. If that obligation is subsequently canceled, you may be required to include the amount of the canceled debt in gross income. A commercial lender canceling a debt will issue a Form 1099-C  Cancellation of Debt, to report the cancellation. Often we see this with mortgages and credit cards after the filing of a Chapter 7 or Chapter 13 case.

On Form 1099-A, the lender reports the amount of the debt owed (principal only) and the fair market value of the secured property. You, the debtor, use these values to determine a gain or loss on the disposition of the property. On Form 1099-C, the lender reports the amount of the canceled debt. If the lender’s acquisition of an interest in the secured property (or the debtor’s abandonment of the property) and the cancellation of the debt occur in the same calendar year, the lender may issue a Form 1099-C only.

Either form can have a large impact on tax obligations. If you receive a 1099-C, the IRS will include the amount reported as imputed income and you are obligated to pay tax on the amount of the income. On the 1099-A, you may have a paper gain that would be a taxable event and cause an increase in taxes owed.

So what is the solution? Filing a Form 982 with the IRS will generally relieve you of the tax obligation. The Form 982 is used by people who have filed for bankruptcy and allows the income reported to the IRS to be a non-taxable event in most instances. It can also be used if you are insolvent (assets worth less than liabilities) and have imputed income reported to you.

If you are interested in filing a Chapter 7 or Chapter 13 to deal with IRS or other issues, please contact our office for a free consultation.

At Mickler & Mickler, we attend Court on a regular basis. We have the experience and knowledge to ensure that you receive the correct advice when confronted with difficult financial decisions related to filing bankruptcy. Contact us at 904.725.0822 or bkmickler@planlaw.com.

 

Bryan K. Mickler