1099 and Bankruptcy

A 1099 is a tax reporting form that you may receive if you earn certain types of income. Typically, you will receive a 1099 if you are an independent contractor rather than an employee, and also if you earn investment interest or dividends. A less common use of a 1099 is to report the amount of a forgiven or canceled debt, which the IRS treats as income. If you discharged debts in bankruptcy, you should not receive a 1099.

Form 1099-C

If you do not pay back a debt over a period of time, eventually your creditor will write off the debt as uncollectible and record a bad debt expense in its accounting records. Any institutions that writes off $600 or more of debt must report this to both the debtor and the IRS on Form 1099-C. Since you received money from a creditor and no longer have to pay it back, the IRS considers this money taxable income to you. The amount of the canceled debt will show on line 2 of Form 1099-C; and if you receive one, you must transfer this amount to line 21 of your Form 1040 when you file your taxes.

Bankruptcy Discharge

On line 6 of Form 1099-C there is a box that may be checked if your debt cancellation was due to bankruptcy. This is because debt forgiven in a bankruptcy discharge is not taxable under federal law. Although most creditors that were included in your bankruptcy will not send a 1099-C at all, some may send one showing that the amount of the debt was included in bankruptcy.

Discharged Creditors That Send a 1099-C

If you legally discharged your debt in bankruptcy and still receive a 1099-C with no bankruptcy box checked, you must file Form 982 with the IRS to prevent taxation on the amount of your discharged debt. Check line 1a to show that your debt should be excluded due to a discharge of indebtedness in a Title 11 case. No matter what chapter of bankruptcy you filed, they all fall under Title 11 of the Bankruptcy Code, so line 1a applies to all cases. Enter the amount of your discharged debt on line 2.


Even if you did not formally file bankruptcy at the time your creditor wrote off your debt, you may be able to avoid taxation on at least a portion of the debt. If you were legally insolvent at the time the debt was canceled, you can exclude the amount of your insolvency from your income. According to the IRS, you are legally insolvent to the extent that your debts were greater than the fair market value of all of your assets at the time of the debt cancellation. For example, if you owe $10,000 in credit card debt and only have $1,000 in assets, you are insolvent to the extent of $9,000. You can enter this amount on line 2 of Form 982 after checking the insolvency box on line 1b.