If a lender cancels or forgives a debt and you no longer have to repay it, the forgiven amount is usually considered taxable income. In many cases, you'll receive a Form 1099-C reporting the canceled debt.
However, if the debt was discharged through a Title 11 bankruptcy case, you can generally exclude the forgiven amount from your taxable income by filing Form 982.
What Is a Title 11 Case?
A Title 11 case is a bankruptcy proceeding filed under Title 11 of the U.S. Code, which governs bankruptcy laws in the United States.
For the debt cancellation to qualify for the bankruptcy exclusion:
- You must have been under the jurisdiction of a bankruptcy court.
- The debt discharge must have been granted by the court or included in a court-approved bankruptcy plan.
If you filed for bankruptcy and had debts discharged, check with your bankruptcy attorney or the bankruptcy court that handled your case to confirm whether your canceled debt qualifies for this exclusion.
How Much Forgiven Debt Can Be Excluded?
Generally, if the debt was discharged as part of a qualifying Title 11 bankruptcy case, you can exclude the entire amount of the canceled debt from your income.
Keep in mind that excluding canceled debt through bankruptcy may require you to reduce certain tax attributes, such as capital loss carryovers or tax credits. Form 982 is used to report both the exclusion and any required reductions.
Filing Form 982 in Our Software
To report a qualifying bankruptcy exclusion:
- Go to Federal.
- Select Income (Select My Forms).
- Choose Less Common Income.
- Select Cancellation of Debt (1099-C, Form 982).
- Choose Exclusions (Form 982).
Additional Information
Form 982 is used to report canceled debt that can be excluded from income due to bankruptcy, insolvency, qualified farm indebtedness, and certain other situations. If you're unsure whether your debt discharge qualifies under a Title 11 case, review your bankruptcy documents or consult the professional who assisted with your bankruptcy filing.
For more details about Form 982 and reductions of tax attributes related to canceled debt, see the IRS instructions for Form 982.