Tax consequences of student loan discharge via bankruptcy vs disability discharge

[annon1]

My 3 years for my 98K (I've paid back 102K and only borrowed 92K - capitalization of interest got me) via the physician's letter disability discharge option won't be final until Nov 2026 due to the 3 year monitoring period. As a result i will get a 1099-C. Netnet states on their website that when the 3 year monitoring is up is when your student loan is considered discharged for tax purposes (which is very unfortunate). The federal circuit court district I live in a Dallas judge ruled only those who are permanently and totally disabled can discharge their debts via an adversarial proceeding in bankruptcy (it used to be Bruner's but on appeal his ruling was upheld). Now I'd qualify for bankruptcy that way that although that is my only debt. Not sure if I can do that if they are already in monitoring though. I need to find out (unless someone already knows that). My question presumes I can do that. 

If I go the bankruptcy route before the end of 2025 will I get a 1099-C? Also if I go that route will what little I still have in retirement (employer plus a small Roth IRA) be taken in the bankruptcy (I realize that part isn't a turbo tax question but maybe someone reading that knows the answer). 

I know about insolvency. I don't want to lose what little I have in retirement to go that route if I can find another way where the discharged amount isn't taxable (I am 71). 

Thank you.

[MarilynG1 · Accepted solution]

Normally student loan debt can't be discharged in a bankruptcy, except for the adversarial proceeding you mention.

Your retirement plan funds are protected in most cases from bankruptcy under the ERISA Act (Employee Retirement Income Security). 

Here's some info from Studentaid.gov you may find helpful. 

Debts discharged in bankruptcy are usually not considered taxable income.  Here's more info from the IRS on that. 

[annon1]

Thank you so much for that information! I was pretty sure I wouldn't have to pay taxes on that, but when I read something that stated people got 1099-C's for canceled debt, and one source said for some debt in bankruptcies, then I wasn't sure even though I was pretty sure that was wrong. 

President Biden's announcement on Jan 13th that he was discharing the student loans of disabled students I hope means discharging now rather than when the 3 year monitoring is over (for me 11/2026) as that would solve the problem. Nelnet (not necessarily a reliable source of information unfortunately even though they are the ones that handle the school loans of those who are filing for disability discharge) however stated he was only talking about what he did historically despite this was included in the news release in a sentence about new action. I sure wish information that gives the actual details of his actions in that executive order would be published soon so I know what is going on. I'd just as soon not have to file for bankruptcy if I don't have to. Just for starters my car insurance rates will go up since that will trash my credit (I live in a state where that is legal). 

Thanks again for your answer and links. I appreciate it.