Do I have to claim my discharged debts as income on my 2011 tax return?

[grapes11]

I was discharged in August 2011. Everything was going fine... but... I am preparing to file my 2011 taxes and was hoping for the earned income credit that I normally receive. However, I was doing some searching online and saw some things about a Form 1099-C being sent to me by my former creditors, and having to report my cancelled debt as income. I have not received any of these forms yet but am becoming worried. Will I have to report this as income?? If so, I'm in deep financial trouble, yet again. I am depending on my tax return, not to mention the fact that if I end up owing taxes on all this "income" there is no way I can pay them!
What are the laws regarding this?

[IBroke]

A BK is no debt forgiveness. The debt actually still exists but it can't be collected any more. That discharged debt doesn't count as income.

If you settle your debts, however, the forgiven part does indeed count as income. That's why these settlement offers always went directly into the trash.

[grapes11]

A BK is no debt forgiveness. The debt actually still exists but it can't be collected any more. That discharged debt doesn't count as income.

thank you!! feeling relieved to read this

[lillymarlene]

I could be wrong, but I don't think you have to pay on any debts that are discharged in bankruptcy. I think the 1099's are only supposed to be valid for "forgiven" debts that have not been included in your bankruptcy. To be sure, you might ask your attorney. Then also, if you have an accountant do your taxes, you may be able to ask him or her.

[ValleYum]

From IRS Publication 4681:

Bankruptcy

Debt canceled in a title 11 bankruptcy case is not included in your income. A title 11 bankruptcy case is a case under title 11 of the United States Code (including all chapters in title 11 such as chapters 7, 11, and 13), but only if the debtor is under the jurisdiction of the court and the cancellation of the debt is granted by the court or occurs as a result of a plan approved by the court.

How to report the bankruptcy exclusion: To show that your debt was canceled in a bankruptcy case and is excluded from income, attach Form 982 to your federal income tax return and check the box on line 1a. Lines 1b through 1f do not apply to a cancellation that occurs in a title 11 bankruptcy case. Enter the total amount of debt canceled in your title 11 bankruptcy case on line 2. You must also reduce your tax attributes in Part II of Form 982 as explained under Reduction of Tax Attributes, later.

[grapes11]

thank you so much to everyone who has replied! i will discuss this with my accountant as well, but i'm not dreading going to do my taxes nearly as much now

[HHM]

Short answer, NO

Longer answer, if you get a 1099-C from a lender, you will need to file form 982 with your income tax return. The IRS doesn't know you filed BK, so you have to tell them. But only do form 982 if you actually receive a form 1099-C.

[spidge]

If you settle your debts, however, the forgiven part does indeed count as income. That's why these settlement offers always went directly into the trash.

The exception is insolvency which the IRS has a form for.