My name is Danielle Diaz. One of the things I've learned in life, both inside and outside the courtroom, is that it is important to not see others as your enemy. Even though you may see the prosecutor as your enemy, he or she is just trying to do a job. It may be possible that you can get a prosecutor or the judge to be sympathetic and get him or her on your side. In order to accomplish this, you need to understand the law. I feel that most individuals do not understand the law, which is why I was motivated to create this blog.
The cancellation of debt usually results in taxable income to the individual who no longer owes the debt. There are exceptions, one of which applies to debt discharged in bankruptcy. Individuals who receive debt forgiveness in a chapter 13 bankruptcy case can avoid taxation on the canceled debt by filing a specific additional tax form with their income tax return.
An individual in a chapter 13 bankruptcy case typically attempts to reorganize their payment of secured debts. Unsecured debts, such as credit cards or medical bills, may be modified or even eliminated. Each creditor that receives court notice of a forced reduction in debt may subsequently issue an IRS Form 1099-C to the debtor.
Form 1099-C reports the amount of canceled debt. The form is also sent to the IRS, so the amount of forgiven debt becomes potentially taxable at that point. The forgiven debt on Form 1099-C does not have to be reported as income if you include it on IRS Form 982 along with your income tax return for the applicable year.
Form 982 essentially notifies the IRS why the canceled debt is not reported as income. The amount of forgiven debt reported on Form 982 is not actually entered anywhere on Form 1040.
Form 982 is sometimes confusing to tax filers due to its use of legal and accounting terminology. There is a specific checkbox near the top of Form 982 to indicate that you are excluding income due to a title 11 case. Title 11 is the part of the U.S. legal code that provides for bankruptcy protection. Chapter 13, in turn, is a part of title 11. There is no checkbox for any specific bankruptcy chapter.
The second part of Form 982 essentially adjusts your financial basis in any asset on which debt was modified. Your initial basis in an asset is often its cost or its loan balance. Basis is the amount you would use to figure a gain or loss if you were to sell the asset. The reduction in basis is referred to on Form 982 as a reduction of tax attributes.
Because you are disclaiming income that would have otherwise been taxable, you must also reduce your basis. For example, if you still possess a vehicle on which debt was reduced, you must reduce your basis by the amount of debt canceled.
Debt forgiven before the filing of a chapter 13 bankruptcy does not qualify for the title 11 exclusion. An earlier debt cancellation might be excludable only to the extent that you were insolvent at that time. Before negotiating with creditors, speak with a bankruptcy attorney or visit a bankruptcy attorney's website like http://www.lebaronjensen.com/ in order to determine the most practical way to proceed forward.