What If a Creditor Sends You a 1099-C

This time of year my firm receives quite a few calls from current and former clients who have received a 1099-C document from a creditor. This is an IRS form that deals with debt that has been cancelled (hence the “C”) due to some event taking place during the specific tax year.

Creditors Required to Report When Debt is Forgiven

Creditors are required by federal law to report when debt has been cancelled or forgiven and then you as the tax payer must report this as income. Many inexperienced tax preparers believe that this must be counted as income and therefore taxable.  An exception applies if the debt has been discharged in a bankruptcy case and in box number 6 where it states “identifiable event code”, this form should be marked with a “B”. This lets the IRS know that it has been discharged in a bankruptcy case.

I have seen this box not marked or marked in correctly before so you may want to include an IRS form 982 where you can disclose that the debt being reported was discharged in a bankruptcy proceeding. It is also wise to include a copy of your Discharge order from your case with this form 982 and the tax return.

Example of Creditor Abuse

I recently received a call from a potential client who had previously filed and received a discharge in a Chapter 7 case. My firm had not represented her in that case, but she ran into a problem with a creditor who was demanding more than $1500 for a medical bill she owed prior to her chapter 7 case being filed. She was unaware of the debt being owed because she had not received any billing from the creditor in many years and it had not appeared on her credit report that she obtained before she filed her bankruptcy case. When she went to this medical facility recently in an emergency situation, they refused treatment until she paid them. She even had the where with all to show them a copy of her bankruptcy case which she had as an attachment to an email on her smartphone.

Upon further review of the facts, her case appears to have been a no asset case and as such, this debt was discharged as well upon giving notice to that creditor which she did. This was still not good enough for this creditor. Long story short, she paid the money because she needed immediate treatment. In my humble opinion, it appears the creditor is now in violation of the discharge injunction of her chapter 7 case and needs to refund her money immediately.

The bankruptcy laws are in place to protect good people such as this woman from a creditor taking adverse actions against her such as this and others including lawsuits, garnishments, repossessions, and foreclosures. At Bond and Botes, we have the experience to guide you through the complex maze of bankruptcy. If you are currently dealing with debt that seems overwhelming, facing foreclosure, repossession, garnishments, lawsuits, or collections, turn to the professionals at Bond and Botes. Our firm has been helping good people going through bad times for more than 20 years.