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  • Robert Weed

Bankruptcy, foreclosure, 1099-A and 1099-C

You don’t need to worry about getting a 1099-A.

If the bank took over your house in a foreclosure, either before or after filing a bankruptcy,  you will receive a copy of a 1099-A.  Form 1099-A is a form the mortgage company is required to file to show that they acquired your property.  It’s what the IRS calls an informational return–it just gives information to the IRS.

You should not receive a 1099-C, which is a cancellation of debt return.  You should not, but you might anyway.  You should not, because there are NO tax consequences for debts discharged in bankruptcy.  So you are NOT taxed on what they didn’t get at the foreclosure sale.   The bankruptcy protects you from that tax.  Here’s the link to the IRS website that says that.    http://www.irs.gov/newsroom/article/0,,id=174034,00.html.

If you get a 1099-C anyway , the IRS may later write to you and say, hey, you owe us another $XX,000.00 because of the debt cancellation.    If you get that letter from the IRS, you need to write them back and say this debt was discharged in bankruptcy.  Send them a copy of your papers.  I’ve always seen that work.   I can get you another copy of your bankruptcy discharge, if you lost yours.

(One thing I should add; I’m assuming your property is here in Virginia or another state that has similar mortgage laws.   If your property is in a state like California, where the mortgage company cannot chase you after a foreclosure, in certain circumstances, it would be really important to file your bankruptcy before the foreclosure sale, not after.)

So, here’s the summary.

Get a 1099-A.  Expect to get one; no need to do anything.

Get a 1099-C.  Should not get one, if you do, expect to hear from the IRS.

IRS letter saying, you owe us all this money.  Write back and say, no I don’t, because of the bankruptcy.  There is a deadline for replying, so make sure you do write back and send them the bankruptcy info.   They are easy to deal with if you reply quickly, but get stubborn if you ignore it until they try to collect the money,

(If you want, you can fill in the IRS Form for this.  Check the very first box, 1a.  Title 11 means “bankruptcy.” )

PS If you get a 1099-C after a bankruptcy, there should be an A in box 6.  That’s explained here Letter Codes for Box 6 of the 1099. 1099-C, A in box 6, tells the IRS there’s no tax on the cancellation because the cancellation was a bankruptcy.

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