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1099-A or 1099-C for Mortgage Debt Discharged in Chapter 7 Bankruptcy?

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If you have to surrender your home in a Chapter 7 Bankruptcy, the mortgage lender will provide you with a 1099-C. When you file a Chapter 7, the tradeoff is that the mortgage debt is completely dischargeable but you cannot keep your home.

Another tradeoff is that when the mortgage debt is forgiven, the IRS views the forgiven amount as income. So, homeowners do not have to pay the remainder of the mortgage but the amount forgiven is taxable income.

When a debt is forgiven, the IRS requires that the lender provide the borrower with a 1099-C form. The borrower is then required to file the 1099-C with the IRS. The 1099-C represents income from the cancellation of a debt.

One way to explain the form is that a 1099 is used to report income earned from a job. Form 1099-C reports income made from the cancellation of a debt. When the loan is made, the borrower makes a promise to pay and the lender receives a secured interest in the property. At the time the loan is made, the money is not considered income because the borrower promises to pay the money back to the lender. When that promise to pay is discharged, the IRS views the forgiven amount as taxable income.

You may be wondering how you will pay the taxes on this income if you have filed bankruptcy. You filed because you do not have enough money to pay your bills. Where are you supposed to get the money to pay the taxes on this income?

The good news is that in 2007, The Mortgage Debt Relief Act of 2007 was passed. As a result of this Act, taxpayers can have up to $2 million of mortgage loans forgiven before being taxed. According to the IRS website, this Act will be in place through the end of 2013. It is important to realize that this Act only covers debt forgiven for a mortgage. If you have debt forgiven from another type of loan, you will receive a 1099-C for that loan and you will be responsible to pay the applicable taxes.

If you do not understand your 1099-C or believe there is an error, start with contacting the lender. Other options are to contact the IRS or speak with your bankruptcy attorney.


This article contains general legal information but does not constitute professional legal advice for your particular situation. The Law Dictionary is not a law firm, and this page does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

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