About 10 years ago I borrowed from the equity in a whole life policy. I was never able to pay back this amount. In 2006 I declared bankruptcy and listed the loan amount plus accrued interest on the loan.
Recently I received a phone call from the insurance company saying that I was going to receive a 1099 for the amount I owed. It seems they were using dividends to pay the premiums, but I was unaware of this.
Will I owe taxes on this amount even with the bankruptcy?
Richard
Did you discharge this debt/loan in bankruptcy?
Even if not, if your liabilities were more than your assets on the date they cancelled your debt, you can get out of this income by filing form 982. And being to prove on your balance sheet that you were "financially insolvent."
Probably, but likely not for the reasons you think. Let's back into this -
1 - you declared bankruptcy in 2006;2 - a 1099-C will be issued in 2011;
Hence, the IRS will have no idea that the 1099-C is related a debt that was discharged some 5 years ago. And I think your situation gets move convoluted. While you listed the insurance loan as a debt when you filed in
06, did you ever actually cancel the life insurance policy or notify the insurance company? Failing to cancel the policy MAY have been (mis)construed as a reaffirmation of the debt by the insurance company effectively removing it from the filing.Then there's the issue that when you borrow from your equity you may actually be borrowing from yourself. I AM NOT SURE ABOUT THIS, but its worth looking into. Most life insurance contracts let you borrow your equity - after all its yours - then they charge you an interest rate on the "loan" that is quite close to or actually equal to the interest rate paid on the equity. This effectively wipes out any interest between you and the insurance company, leaving just the loan outstanding.
Now, you may be able to get of the tax liability IF you have a copy of the bankruptcy discharge showing the insurance loan as discharged. And if you have that paperwork I'd suggest you forward A COPY of it on to the insurance company and try to get them to NOT issue the 1099-C to start with. It would be much easier if you didn't have to deal with the 1099-C at all.
If the insurance company won't accept the bankruptcy filing as sufficient to not issue the 1099-C you may have to send a copy to the IRS to support your position that the cancelled loan is not taxable.
Good luck, Gene E. Utterback, EA, RFC, ABA
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