If you filed for bankruptcy and had debts discharged, you might be surprised (and a little panicked) to receive a Form 1099-C, Cancellation of Debt from a creditor in January or February. Many people worry that this means they now owe taxes on the forgiven debt. The good news? You don’t owe taxes on discharged debts from bankruptcy—but you do need to file a simple form with your tax return to let the IRS know.

Why Did You Receive a 1099-C?

Form 1099-C is issued by creditors when they cancel or forgive a debt of $600 or more. Normally, the IRS treats canceled debt as taxable income. However, debts discharged in bankruptcy are not taxable—they fall under a special exemption in the tax code.

The problem? Creditors are required to send a 1099-C when they cancel a debt, even if the debt was discharged in bankruptcy. They often don’t specify that the debt was discharged under Title 11 (the Bankruptcy Code), leaving you with a misleading tax form that seems to say you owe taxes on the forgiven debt.

The Solution: IRS Form 982

To officially exclude discharged debt from your taxable income, you need to complete IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Here’s how:

  1. Get a copy of Form 982 – You can download it from the IRS website here.
  2. Check Box 1a – This tells the IRS that the debt cancellation was due to a bankruptcy case under Title 11.
  3. Enter the amount from the 1099-C on Line 2 – This confirms the total amount of debt discharged.
  4. Attach Form 982 to your tax return – This ensures that the IRS does not count the discharged debt as taxable income.

That’s it! As long as you properly complete Form 982, you will not owe any taxes on the discharged debt.

Common Issues (Even Some Accountants Get This Wrong!)

Many people who receive a 1099-C after bankruptcy call their accountants in a panic—only to find that their accountant isn’t familiar with Form 982. Some accountants mistakenly think the debt is taxable and advise clients to pay taxes they don’t actually owe.

Here’s what to do if your accountant is unfamiliar with Form 982:

  • Send them this article and the link to Form 982 instructions.
  • Remind them that bankruptcy discharge is covered under Title 11 of the U.S. Code and is specifically exempt from taxation.
  • If they still don’t understand it, find a tax professional who does.

Final Thoughts: Don’t Stress, Just File the Right Form

If your debts were discharged in bankruptcy, you do not owe taxes on them—no matter what the 1099-C says. Filing Form 982 with your tax return will prevent any IRS issues and put your mind at ease.