1099-C: Tax Consequences of Forgiven or Settled Debts

The IRS requires creditors to issue a 1099-C form to individuals who  have had their debts forgiven or settled for less than the amount owed.  It applies to debts in excess of $600. www.irs.gov

I don’t owe the money but now the IRS is sending me a huge tax bill!! What’s going on and what can I do?


What  does this mean? Essentially the amount of the debt forgiven is treated  as income to the tax payer. For example a creditor ceases trying to  collect a debt of $5,000. That means you have an extra (even if phantom)  income of $5,000. The same is if a $12,000 debt is settled for $7,000:  the tax payer has an extra income of $5,000.

The  tax payer is required to list the income on Line 21 of Form 1040 and  pay income tax on it. If the tax payer does not list the income on Line  21 the IRS will send a form to the tax payer for the additional tax plus  interest and penalties.


You  negotiate your credit card debt, getting the company to accept $4,000  to settle $10,000 balance.  That “forgiven” $6,000 is cancelled debt,  reported on Form 1099-C, and must included on Line 21 of Form 1040 as  taxable income.

You have a short sale on  your home and the mortgage company “forgives” the remaining mortgage  amount of $6000.  That “forgiven” $6,000 is cancelled debt, reported on  Form 1099-C and must included on Line 21 of Form 1040 as taxable income.

You  had a loan modification, typically on a home or rental property. The  bank adjusts off some or all of a second mortgage.  That adjusted amount  is debt cancellation.

You a car loan of  $15,000 and stopped making payments. The bank repo(s) the car sells it  for $5000 and forgives the $10,000 ($15,000 – $5000). The $10,000  becomes cancelled debt.


Congress  did exclude Mortgage Forgiveness since 2007 until December 31, 2013.  Now mortgage forgiveness starting in 2014 is income. This will be a  cruel nightmare for foreclosures concluding in 2014 and thereafter.

In  Cook County, Illinois and surrounding counties most home mortgage  foreclosure did not include a deficiency. This has changed and causes  homeowners who lost their home a giant nightmare.

If  the individual has received a discharge in bankruptcy on a case filed  before the 1099-C is issued the matter is resolved. This is the least  complicated option to handle the matter

When negotiating a Short Sale on Real Estate there can be a provision that the debt is disputed and there is no deficiency.

When negotiating a debt settlement, it is agreed the amount owed is disputed and there is no deficiency.

When  a 1099-C is issued the tax payer can file an IRS for 982. In essence to  the extent the tax payer was insolvent the income is excluded. An  example: the debt forgiven is $12,000 and the assets are $2,000 the  income can be fully excluded due to the insolvency.

If you think using IRS form 982 (www.irs.gov)  is your best option you might consider consulting with an accountant or  going to the IRS’ advocate group. A useful presentation is offered at www.youtube.com


Frequently  when a creditor charges off a debt and issues a 1099-C they will sell  the debt to a Junk Debt Buyer. The Junk Debt Buyer will try to collect  the money on the theory that a charge off is not a debt forgiveness. Do  not be fooled into paying the collector. There is no known court  decision upholding the Debt Buyer’s position although one has to assert  this defense if a suit is filed. Additionally, a tax court has recently  ruled against a bank asserting this position even when the bank alleged  that the 1099-C was issued in error.

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