Cancellation of debt

[WLCTKC]

I received a 1099-C "Cancellation of Debt" for 2021. In 2018 we finished a Chapter 13 bankruptcy where a home equity loan was written off and in 2021 they Cancelled the written off debt. Since we had no way of paying the written off debt in the Bankruptcy, is the Cancellation of Debt taxable or do I need to fill out the Form 982?

[ColeenD3]

Yes, you must file Form 982. See the instructions here.

Bankruptcy Debt canceled in a title 11 bankruptcy case isn't included in your income. A title 11 bankruptcy case is a case under title 11 of the United States Code (including all chapters in title 11 such as chapters 7, 11, and 13). You must be a debtor under the jurisdiction of the court and the cancellation of the debt must be granted by the court or occur as a result of a plan approved by the court. You don’t qualify for the bankruptcy exclusion by being an owner of, or a partner in a partnership that owns, a grantor trust or disregarded entity that is a debtor in a title 11 bankruptcy case.

You must be a debtor in a title 11 bankruptcy case to qualify for this exclusion.

How to report the bankruptcy exclusion.

To show that your debt was canceled in a bankruptcy case and is excluded from income, attach Form 982 to your federal income tax return and check the box on line 1a. Lines 1b through 1e don't apply to a cancellation that occurs in a title 11 bankruptcy case. Enter the total amount of debt canceled in your title 11 bankruptcy case on line 2. You must also reduce your tax attributes in Part II of Form 982 as explained under Reduction of Tax Attributes, later.

[WLCTKC]

I would like to verify that the debt is still not taxable even though the events that caused the write off occurred in 2013-2018? The fact that they Cancelled the Debt 3 years after the bankruptcy was finished in 2021 doesn't make any difference?

Thank you for the answer. 

[PattiF]

To verify what @ColeenD3 said:

"A debt discharged in bankruptcy has no income tax consequences to an individual debtor, as it is excluded from a debtor’s gross income pursuant to Internal Revenue Code §108(a)(1)(A). Notwithstanding this, it is not uncommon for a debtor to receive an IRS Form 1099-C, Cancellation of Debt in connection with a debt discharged in bankruptcy.

If this occurs, simply file with your next tax return an IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, advising the IRS that the debt in question was discharged in bankruptcy. This form can be obtained at www.irs.gov, or from your tax preparer."

From Mid Hudson Bankruptcy Lawyers