The Bankruptcy Law Center
Law Office of Don Provencio, PA
Albuquerque, NM

The Bankruptcy Law Center - 505-242-STOP (7867)

I help my clients, not judge them. Financial problems can arise from circumstances beyond your control. Medical problems or divorce can lead to debts that grow out of control. You have made an important step by visiting my website.

Debt forgiveness occurs when a Creditor releases you from debt and is common when negotiating with a Mortgage Company concerning options to foreclosure or with Credit Card Companies when negotiating the payoff of a debt for less than the amount owed. This may result in the issuance of a 1099-C which is sent to you and the IRS by the Mortgage or Credit Card Company for the amount of the debt which is forgiven. You must then include this amount on your tax return as additional income and a tax liability will occur. The discharge of debt in either a Chapter 7 or Chapter 13 bankruptcy will not result in a 1099-C being sent to the IRS because bankruptcy does not forgive debt; but, rather, bankruptcy eliminates the debt to those creditors. As you consider negotiating the forgiveness of debt as an option, it is important to remember that any type of debt forgiveness is an economic decision, not a moral one. Regardless, you need the help of a professional.

Again, most debts that are canceled or forgiven by a Creditor must be reported as income on your federal taxes. If the amount is more than $600 then a lender will issue you a Form 1099-C stating the amount of the debt forgiven which is considered income and which you must report on your taxes. You will not have to pay taxes on canceled or forgiven debt income if you can show that you are insolvent or have filed bankruptcy to eliminate the debt. However, you will have to adjust any tax attributes on anything with canceled or forgiven debt. Your CPA or qualified tax preparer should know the proper way to handle the adjustment of tax attributes.