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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 39139
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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Do I have to file for bankruptcy prior to the issue of 1099

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Do I have to file for bankruptcy prior to the issue of 1099 in order to avoid the taxable situation? Can I file for bankruptcy after I receive a 1099 and dismiss the income?

Under IRC §108(a)(1), cancellation of debt income (1099c) is excluded from taxation if (1) the discharge of indebtedness occurs in title 11 (bankruptcy) cases, or (2) if the discharge occurs when the taxpayer is insolvent and the amount excluded is not more than the amount by which the taxpayer is insolvent.


BotXXXXX XXXXXne, if you file bankruptcy before your debt is "charged off" by the creditor, you will not have to demonstrate your insolvency to the bankruptcy court.


Hope this helps.


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Customer: replied 7 years ago.
Can I file after the debt is being discharge and still claims to be insolvent? therefore avoid the tax liability of the 1099

That's the #2 factor I already explained You woulkd have to sue the IRS in bankruptcy court and show that you were insolvent and that th debt should be discharged.


Some fun, huh?


Customer: replied 7 years ago.
I am not sure I quite understand. My dilemma is that my income property just got sold at foreclosure sale and I don't know when the 1099 will be issued. I would like to file for bankruptcy but my wife only lost her job last month so our ave income is still too high. And the definition of insolvent is different between bankruptcy court and the IRS. for bankruptcy court, my retirement account is safe, but for IRS everything is in play. I don't want to lose all y retirement income to the IRS.

The date that the 1099c is issued is irrelevant. What matters is the date at which the debt becomes uncollectable by the creditor. That is a question of fact for any debt. But, for a foreclosure sale in California, a first trust deed sold at a foreclosure sale is uncollectable at the instant of foreclosure. Whereas an second trust deed equity credit line on the same property is not uncollectable until the creditor has taken reasonable steps to collect (i.e., sued for a deficiency judgment and then found the debtor without sufficient assets to pay the judgment), or the debtor files for bankruptcy protection.


Re the definition of insolvent and retiremnt accounts, "a taxpayer claiming to be insolvent for purposes of S 108(a)(1)(B) and challenging the Commissioner's determination of deficiency must prove by a preponderance of the evidence that he or she will be called upon to pay an obligation claimed to be a liability and that the total amount of liabilities so proved exceed the fair market value of his or her assets." Merkel v. Commissioner of Internal Revenue, 192 F.3d 844 (9th Cir. 09/17/1999) In other words, a retirement account with sufficient value to pay a debt, though exempt from the requirement of being used to pay that debt, is nevertheles avaialble to pay that debt, and therefore, the debtor is not insolvent for the purposes of IRC 108(a)(1)(B).


Note: I mistated the law eariler by saying that you would have to sue the IRS in bankruptcy court. The process is that you would not declare the 1099c income on your return and then have to sue the IRS in either Tax Court or Federal District Court to avoid the tax liability, if the IRS found that you were not insolvent at the relevant date.

Edited by socrateaser on 2/6/2010 at 7:07 AM EST
Customer: replied 7 years ago.
I reside in California, but the property is in FL. Do you know if that is much different from CA from your scenario?
Yes. Big difference. Florida permits deficiency judgments on all mortgages. That's actually good for you in this instance, because the debt is still collectable at this time.
Customer: replied 7 years ago.
Sorry to keep this question going for so long ... how do I account for this uncollectable date now?
I don't understand the question. Please rephrase.
Customer: replied 7 years ago.
Is the date at which the debt becomes uncollectible by the creditor in FL determine on a bank by bank basis based on their business practice? How would I know I have beat that date by filing for bankruptcy to avoid the tax burden of that 1099 from the foreclose?

I don't know when banks typically charge off their debt. In order to declare the debt uncollectable, for tax purposes, a taxpayer must take "reasonable steps" to collect. That's a very squishy rule, which probably favors both the bank and the debtor, because each can argue that the debt was either collectable or uncollectable, as may be necessary to support their argument against the IRS.


The 1099c shows the date that the debt was cancelled, and it further shows whether the debtor was known by the creditor to be in bankruptcy at the time of cancellation. So, the IRS probably requires proof from a debtor-taxpayer, any time that the bankruptcy box is left unchecked.


You may be overthinking this, though. If the bank has a deficiency judgment, it would ordinarily have to hold a judgment debtor exam in court to ascertain all of the debtor's assets and their location before requesting a writ of execution or garnishment from the court. And, if it doesn't, then you could argue that it failed to take reasonable steps to collect before cancelling the debt. Point being that you will be served an order to appear in court for that exam, or some other legal process intended to discover your assets before the bank cancels the debt. That's when you would be thinking hard about filing bankruptcy. And, if the bank doesn't conduct that postjudgment process, then you have an argument that the bank didn't take reasonable steps to collect, which means that the debt is not uncollectable under the IRC, and the 1099c is erroneous.





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Customer: replied 7 years ago.
Thank you for being so helpful and patient with me. I would like to ask you another questions about my strategies. Thanks.

It's a very complicated question, you asked. I don't think anyone has a bright-line answer. Anyway, you're welcome and good luck.