You did everything right. You needed to give up your house because it was under water, and couldn’t short sell it. So, you filed bankruptcy, and let the house get foreclosed on. So, as a result of the Chapter 7 Bankruptcy, you can’t be sued on the loan, even if the house was sold for less that what is owed.
Now, months later, you get a 1099-C from the mortgage company. Do you owe taxes on the “cancelled” debt? NO! But, what do you do? You need to give the 1099 to your tax preparer, and, you should fill out a form 982, indicating that the debt was discharged in bankruptcy. You can only be taxed on a cancelled debt if you could have been personally liable on it.
See the IRS links below:
Bottom line: if a debt is discharged in Chapter 7 or Chapter 13 Bankruptcy, you can’t be taxed on the amount eliminated, forgiven, or cancelled. Take a look at my Blog Article on taxes and debts in bankruptcy from 2013 for more.
You can call us to discuss your options in Bankruptcy. This is only general advice, and you should also contact an accountant or tax professional for your unique situation.
Daniel J. Winter
Offices in Chicago, Gurnee, Oak Lawn, and Skokie, Illinois