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My Ex-spouse Took The House During Our Divorce And Filed For Bankruptcy. Do I Owe Taxes On The Forgiven Debt

Lynnette Khalfani-Cox, The Money Coach by Lynnette Khalfani-Cox, The Money Coach
in Bankruptcy, Taxes
Reading Time: 2 mins read
Building blocks spelling tax, with calculator and paperwork
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Q: I received a 1099-c form from the mortgage company I used to have a loan with. My ex-wife and I were both on the mortgage. She took the house in the divorce and never got my name off of the loan. She then filed bankruptcy. I received the 1099c form that simply showed the amount of debt forgiven and the reason being bankruptcy. I never personally filed bankruptcy. Do I owe taxes on this forgiven debt?

A: Since this is such a specialized tax matter, we asked CPA Gregory Lauray for his advice. Here’s what he had to say:

Lenders are generally required to report any debt forgiveness on form 1099-c, however, debt forgiveness income is determined by the existence of certain circumstances. Debts forgiven pursuant to a bankruptcy action are not considered taxable income.  However, the debtor must reduce certain tax attributes (i.e. net operating loss carryovers, carryovers of general business credits, capital loss carryovers and etc.) in the amount of the debt forgiven.   In effect, this means that the bankrupt individual will pay the taxes on the debt forgiven by either losing certain tax benefits and/or increasing gains on certain assets if they’re sold later.  The divorce effectively makes this your ex-wife’s debt forgiveness since she effectively assumed the mortgage pursuant to the divorce decree.  You’ll want to be ready to prove that if the question arises.

Gregory K. Lauray & Co., P.A. assumes no liability for reliance on these information as we don’t know your circumstances nor the completeness of the fact situations presented, both of which could alter responses.  Always consult a qualified tax professional about your specific tax situation.

Tags: income taxesTaxable Income
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About

Lynnette Khalfani-Cox, The Money Coach®, is a personal finance expert, speaker, and author of 15 money-management books, including the New York Times bestseller Zero Debt: The Ultimate Guide to Financial Freedom.

Lynnette has been seen on more than 1,000 TV segments nationwide, including television appearances on Oprah, Dr. Phil, The Dr. Oz Show, The Steve Harvey Show, Good Morning America, The TODAY Show and many more.

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