Does charged off CC debt (later discharged) become taxable?

[bornfree2]

Something that is unclear to me. In consumer debt that has been charged off...does that become a tax liability when it is discharged by BK? Can I expect to a future tax bill against the CC debt im looking to discharge with Chapter 7?

[justbroke]

Short answer: yes, it's taxable but you can complete a form (Form 982) to change it to non-taxable due to bankruptcy.

Long answer: charged-off debt can become taxable once the creditor sends an IRS Form 1099-C (there's also an "A" version of the form). I suppose it's technically taxable as soon as the taxpayer knows it's forgiven, but that's another story. This Form 1099-C (Forgiveness of Debt) lets IRS know that the debt was forgiven. It becomes a taxable event at your normal tax rate. Yes, taxed at your normal rate the same as income.

But, the government isn't that cruel. There's a form known as Form 982 which allows you to adjust the taxability of certain taxable events. The first item on that form (on line 1a) is Insolvency (bankruptcy). So someone who included the underlying debt in bankruptcy can file a Form 982 in the same year they get the 1099-C related to that discharged debt. I am not a tax expert, but it is possible that one could "prove" insolvency and use the same reason for debts not included in a bankruptcy.

I always tell people that receive a Form 982 to seek a professional tax preparer. I'm no expert.

[bornfree2]

Thanks justbroke. here is a link on this form 982 for others who in the future may ask the same https://www.irs.gov/forms-pubs/about-form-982