Tax Issues After Bankruptcy & Foreclosure

Question: I filed for Chapter 7 bankruptcy and then lost my house to foreclosure because I couldn't make the payments. After the foreclosure sale, the bank sent me a 1099 form because they got less then what I owed at the sale. What should I do?

Answer: Any time a debt is forgiven, it might be considered income under the Internal Revenue Code. Debt forgiveness over $600 must be reported to the IRS as income to the borrower -- money not actually received by the borrower, but money that is taxable. However, debt forgiveness received in bankruptcy is not taxable. You filed bankruptcy before the foreclosure, so the debt forgiveness occurred when you received your discharge and not when the foreclosure sale occurred.

The procedure claim the debt forgiveness as not taxable is relatively simple. You should provide a copy of our discharge order to your tax preparer and then ask them to compete IRS Form 982 and attach it to your tax return. You should not have any further problems with this issue.

The information provided in this article is general information only and is not intended as legal advice. DO NOT use this information as a substitute for obtaining qualified legal advice or other professional help.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning, insurance subrogation and debt collection.