Bankruptcy often involves surrendering a significant asset such as a home in exchange for the corresponding debt being forgiven. IRS Form 1099-A details the surrender of a home in exchange for the forgiveness of a debt. This form is used to complete a personal income tax return.
A 1099-A is important for a personal tax return because it tells you how much of your mortgage was forgiven as a result of the foreclosure or abandonment because of bankruptcy. Normally, canceled debt is considered taxable income, but obligations canceled because of bankruptcy aren't taxable. You will need to report the canceled debt on Internal Revenue Service Form 982 to show how much debt was canceled and to verify it was through bankruptcy.
Because the canceled debt isn't taxed in the year it is forgiven, the IRS requires you to decrease your tax attributes so it can recover the tax proceeds in later years. This means you will have to decrease your basis in assets, future tax credits and deductions by an amount equal to the total debt that was forgiven through bankruptcy.
When people take on debt to such a degree that they have no ability to repay, they can declare bankruptcy. Bankruptcy is a legal process that reorganizes or cancels debts so people can start over. The debtor will usually have to surrender a lot of what he owns to pay down his debts. Also, his credit report will show he went through bankruptcy, which will decrease his credit score.
There are two types of personal bankruptcy. Under Chapter 13, the debtor submits a report of his assets and liabilities to the court. The court decides how much the person will owe and determines a payment plan. Under Chapter 7, most of the person's assets are sold to settle the outstanding debts. At the end of the process, any debt that isn't satisfied is forgiven.
A 1099-A details the financial transaction of a home's abandonment or foreclosure. The form is completed by the person who held the debt that the house secured, and a copy is sent to the IRS and the person who owned the home. In addition to the lender's and former owner's tax identification numbers, the form states the date the lender acquired the property, the amount of outstanding principal on the debt, the property's market value, a property description and an indication of whether the borrower was personally liable for the debt.