You are obviously already well-studied in this area. As I was reading your question, I started formulating an answer in my head, and I thought "debts discharged in bankruptcy is not a taxable event" and then you indicated you knew that; then I started thinking "Form 982" then you indicated you knew that, so let's see if I know anything you haven't already figured out for yourself...
Questions:Given the fact that I've challenged the foreclosures post bankruptcy filing, have I "forfieted" my bankruptcy protection, and so do the 1099-Cs become valid and reportable as "income"?
When a Discharge is entered in bankruptcy, the liability is discharged and thus no taxable event will occur even if the creditor attempts to call the debt "forgiven" thereafter. The only things that normally can bring a debt back in to play were if the debt had been reaffirmed during the bankruptcy case, or if the debtor refinanced afterward, and then defaulted. If no reaffirmation
agreement or subsequent refinance took place, then there is
no debt to be forgiven to be considered income.
Since these legal actions have essentially allowed/facilitated an increase in the amount of the discharged debt (legal fees, taxes paid, interest, etc.), am I responsible for the increased amount, or even all of it because of such actions?
I doubt if you will find a concrete answer on this, since the accurate answer is "If the judge says you are." Normally, no - the debtor will not be held accountable for any increases in the amount owed since the debt owed by the debtor was discharged, and generally the creditor will have to try to get their claim - including the increased amount from post-bankruptcy litigation - from the sale of the collateral only. I can say that I have never had a client get stuck with post-bankruptcy damages related to ongoing litigation. BUT... this is not to say that I think a judge couldn't
assess damages if the judge thought the additional post-bankruptcy litigation was excessive or prosecuted only to stall the proceedings. In other words, all liability of the debtor related to the Note is discharged, but it is not impossible for the debtor to incur post-bankruptcy liability for abuse of process or intentional tortious acts post-bankruptcy, though it is really rare for a creditor to attempt to stick that type of ex post facto liability on the debtor. My guess would be that the debtor would not be liable for any of the post-bankruptcy litigation unless the debtor excessively stalled the proceedings to the point that the judge deems it a sufficiently egregious abuse of process to start attaching liability to the debtor.Does the timing of the 1099-C in relation to the bankruptcy filing play a part in any of this?
That's a little vague so I'm not sure if this answers your question: it might. If the 1099-C is issued prior to the bankruptcy, then it is theoretically possible that the IRS
will deem the debt forgiven prior to it being discharged, and thus a taxable event notwithstanding the subsequent bankruptcy. However, that is theory; not necessarily practice. I have had a few clients get a 1099-C, then
we filed bankruptcy shortly thereafter, and the 982 evidently still kept the IRS from pursuing the debtor for taxes on the forgiven debt. Though, it is possible that the IRS didn't drop it because of the 982 but because they deemed the debtor insolvent, which is of course another way to avoid the taxable event when debt is forgiven. The IRS may assume that since the debtor filed bankruptcy shortly after the debt was forgiven, that the debtor was most likely insolvent when the debt was forgiven, so the IRS drops it. It's hard to say. Other than that response, I'm not sure what you are looking for with this question, so if I missed the mark let me know!
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