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Is credit card debt discharged through bankruptcy taxable?

As readers in Escondido know, one consequence of the economic downturn of recent years has been the increase in credit card default by cardholders. This is understandable, given the pressures placed on those who have lost jobs or seen investments shrink. Comparatively speaking, paying off credit card debt would likely come second to paying for necessities like food, housing and child care.

However, what many of those cardholders don't know, until they receive a Form 1099-C from their lenders in the mail, is that credit card debt is considered taxable income if it cannot be shown that the debt was discharged through bankruptcy. In that case, a former debtor could be held responsible for the taxes attached to the credit card debt.

1099-Cs are tax forms issued by the lender to the cardholder and the IRS, detailing the cancellation of the debt at issue. In some cases, a cardholder may have discharged the debt years earlier in bankruptcy proceedings. But the former debtor will still receive the 1099-C after the financial institution stops trying to collect and writes off the debt for its own tax deduction purposes.

The only way to avoid paying taxes on the forgiven debt at that point is to produce the documentation from the bankruptcy proceedings. If those records are no longer in a person's files, that could mean trouble. Credit card debt that is canceled or forgiven is taxable income unless it can be shown that the debt was discharged through bankruptcy proceedings.

When the current economic crisis hit America, many households found it increasingly necessary to get their fiscal houses in order. For many people, bankruptcy has been a tool that offers protection for individuals to regain their financial footing and aim for a more secure future.

Source: USA Today, "Cancelled credit card debts come back to haunt taxpayers," Sandra Block, Mar. 5, 2012

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