Be careful if you settle any credit card debts before filing bankruptcy because you may convert a debt that is dischargeable in bankruptcy into a non-dischargeable debt.

Generally, a creditor is required to issue IRS Form 1099-C to a debtor for any debts forgiven greater than $600.  What does this mean in bankruptcy? Settling a debt before filing for bankruptcy potentially transmutates a dischargeable unsecured debt into a non-dischargeable tax debt. Credit card debt is generally unsecured and is dischargeable in bankruptcy. However, forgiven debt becomes income which is subject to income taxes, and tax debts less than 3-years old are generally not dischargeable in bankruptcy.

Example: You owe American Express $20,000 and you settle the debt for $5,000. American Express issues a 1099-C to you for $15,000 which you need to declare as income when you file your tax return. If you are in a 20% tax bracket you may incur a $3,000 tax liability that is non-dischargeable in bankruptcy.

Steven R. Striffler

Law Office of Steven R. Striffler

21 McGrath Highway, Suite 301

Quincy, MA 02169

Admitted in Massachusetts and Rhode Island