1099-C and filed bankruptcy

[oceanlovin'ea]

Client got a 1099C for a credit card company. She settled early in year.

Later in year they filed bankruptcy for all their credit cards, etc...everything but the house.

Does the fact that they filed bankruptcy make the 1099C not taxable?

Linda, EA

[Peachie]

I believe so and

I think the form 982 comes into play. Have you input it into your software and answered the questions?

Peachie

[oceanlovin'ea]

Just let it go through

I am just going to let it go through as taxable. They aren't going to get any of the refund anyway since the bankruptcy trustee will get it to pay creditors.. So not spending any more time on it.

Linda, EA

[Gary2]

I am just going to let it go through as taxable. They aren't going to get any of the refund anyway since the bankruptcy trustee will get it to pay creditors.. So not spending any more time on it.

Linda, EA

Isn't there an ethical responsibility to maximize the refund (legally) on behalf of the bankruptcy trustee, if not the creditors?

[Peachie]

I think this is a

I am just going to let it go through as taxable. They aren't going to get any of the refund anyway since the bankruptcy trustee will get it to pay creditors.. So not spending any more time on it.

Linda, EA

bad choice, but it's jmo. Why should the t/p have a taxable event that isn't?

[Davc]

Client got a 1099C for a credit card company. She settled early in year.

Later in year they filed bankruptcy for all their credit cards, etc...everything but the house.

Does the fact that they filed bankruptcy make the 1099C not taxable?

Linda, EA

Only if it was included in the bankruptcy. You always need to see the court documents in these cases.

[oceanlovin'ea]

Talked to Beanna Whitlock

I was talking to Beanna yesterday about another issue and mentioned this one to her.

She said since the forgiveness of debt came before bankruptcy was filed, it was not part of bankruptcy and is a taxable event.

They would have to prove insolvency in order for it not to be taxable. Knowing this client that would be a big hassle.

When they filed chapter 7 the amount of money they will get back from their tax refund is considered like it was sitting in the bank (so to speak) and is used to pay off creditors if the refund is sizable. It is sizable. So client won't get any of the refund.
Not pursuing the insolvency and just leaving this as taxable only changes the amount that the bankruptcy trustee has to pay off creditors.

Beanna agreed that she would probably do the same thing.

Linda, EA

[taxmandan]

Beanna Whitlock is correct, it won't be in the bankruptcy since it was forgiven prior to the filing with the court. It is taxable unless you can establish that she was insolvent on that particular date. I've seen this often, they negotiate a settlement trying to keep things together but later end up in BK anyway, the forgiven debt is taxable.

[peggysioux]

Bankruptcy

Along the same lines as Linda, scenario is: taxpayer has rental that is in foreclosure and FMV will be less than loan value and taxpayer is liable for difference -- if taxpayer filed bankruptcy prior to bank taking home back and rental property and loan for rental was included in the bankruptcy proceedings, would the taxpayer be free of any cancellation of debt, tax on the cancellation of debt and captial gains?

[Gary2]

Along the same lines as Linda, scenario is: taxpayer has rental that is in foreclosure and FMV will be less than loan value and taxpayer is liable for difference -- if taxpayer filed bankruptcy prior to bank taking home back and rental property and loan for rental was included in the bankruptcy proceedings, would the taxpayer be free of any cancellation of debt, tax on the cancellation of debt and captial gains?

If the loan is canceled, by the bankruptcy, there won't be any cancellation of debt income (though there may be changes to tax attributes). However, I don't think the bankruptcy cancels the capital gains.