Around this time of year, many of you are preparing your taxes. You may have received 1099-C forms from your lenders. Form 1099-C reports income due to the cancellation of debt. Normally, any debt that is cancelled or forgiven is reported as income for income tax purposes. However, debt discharged through bankruptcy is one of several exceptions to this rule.
One important caveat is that if the lender has already forgiven and cancelled the debt prior to the bankruptcy filing, the discharge will not exclude it from income. In that case, you will need to look to other exceptions such as the insolvency exception (cancelled debt is not included in income to the extent liabilities exceed assets when it is cancelled).
Lenders are not required to submit this information for many debts discharged in bankruptcy. They are required to submit Form 1099-C if their records show that the debt was incurred for business or investment purposes. It may also be that the lender has not reflected the bankruptcy in all of its records by the time tax forms are due, or the form is sent out due to an abundance of caution in meeting IRS reporting requirements. No matter what the reason, if you receive a 1099-C form you should give it to your tax preparer to ensure that it is reflected properly in your tax returns for that year.