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Cancelled Student Loan Debt Creates Tax Nightmare

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When Kim Thompson’s $91,000 student loan balance was cancelled due to total disability, she thought she had put at least one of her problems behind her. Instead, she traded it for another: a massive debt to the IRS.

Two years ago, Thompson, who lives in New Jersey, was diagnosed with a tumor that eventually led to the removal of most of her small intestine, a pulmonary embolism, and 12-hour-a-day IV feeding sessions. She retired from her job on a disability pension in July 2010, and was able to get her federal student loans cancelled.

There was no mention, however, that the debt would be reported to the IRS as Cancellation of Debt Income (CODI).

“They didn’t tell me it was taxable income,” she says. “I had no idea.”

The Tax Man Will Come

The IRS considers most types of cancelled debt taxable income. Lenders must report cancelled debts of $600 or more to the IRS on a 1099-C form. The IRS estimates some 6.3 million 1099-Cs – for all types of debts, including student loans, credit cards, mortgages, etc. – were filed to this year reporting CODI for the 2011 tax year.

Not all cancelled student loan debt is taxable. If Thompson’s debt had been forgiven because she worked in a job that qualified her to have some or all of her debt wiped out (certain medical, teaching or law enforcement positions, for example) she wouldn’t now owe the IRS some $26,000. In addition, she owes $5,000 to the state of New Jersey for cancellation of debt income.

But there is no tax break for student loan debt that has been cancelled due to disability, despite the fact that borrowers who qualify for cancellation are considered totally and permanently disabled, and may never work again. In fact, the Department of the Treasury has specifically stated that student loans cancelled due to the Death and Disability Discharge (Section 437(a) of the Higher Education Act of 1965) are taxable.

Your Options

Another option, the insolvency exclusion, which requires debtors to be insolvent immediately prior to the discharge, may have allowed her to avoid paying taxes on some or all of the $91,000 of CODI. Thompson’s accountant concluded she did not qualify, though she’s has some doubt as to whether that’s true.

“The (IRS) forms are incredibly confusing,” she notes.

As a former social worker with a Master’s degree, Thompson says she’s not intimidated by government forms. She filled out all her paperwork to file for disability on her own, for example. However, even though she spent hours researching the rules surrounding cancellation of debt income, she found no relief for her situation. She tried calling the IRS for assistance. The first time she called, she says the IRS representative hung up on her. The second time, she says she waited on hold for over an hour and was then told to call back after she filed her tax return. She claims that ultimately she was warned that if she couldn’t pay the amount due, the IRS would put a tax lien on her house and report her to the credit reporting agencies. (We’ve reached out to the IRS a number of times on this and other issues relating to the 1099-C, but to date haven’t gotten a response.)

Thompson isn’t the only one who has been struggling with this issue. A reader, Debbie, recently commented on the Credit.com blog:

I have a friend that got two 1099 C’s for cancellation of student loans (federal) due to total disability due to cancer of her husband in Jan 2011.  However, her husband passed away in May 2011…This is just another burden on my friend and I am trying to help her out in all ways possible.  She really freaked since the total of the loans were close to $139,000 and she can’t afford to count that as income.  Source:  Credit.com

And reader T.Long commented on the same story:

I had student loan forgiven around for $75,000 this loan was in 1994 I have not a full time job since that time. I received 1099c from NElNet. What are the ways I can be exempt from this tax other then being insolvent by using form 982? If do have to use form 982 and claim insolvent what type attachments (do) I have send along with 982.

And another reader named Kim commented:

My student loans were discharged. I am on Social Security. Do I have to file the 1099-C I received for $62,000? My student loans were discharged due to total disability and I don’t file taxes because Social Security is non-taxable….HELP!!!!

Thompson, who says she would work if she could, is indignant about a policy that forces disabled borrowers like her to trade one type of debt for another.

“There’s a reason my student loans were wiped out and I think they should consider it,” she insists. “It’s just one more thing that I have to worry about.”

Image: DonkeyHotey, via Flickr

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  • Erica

    Now, I’ve heard that this is the same situation for the Public Service Loan Forgiveness loan program, which utilizes a variety of repayment plans, including IBR and ICB. In that case, the principal at the time of forgiveness could be way more than the original loan, since monthly payments under IBR and ICB are less than the interest on the loan. If this is the case, then is PSLF still a smart option?

  • Joe in Seattle

    “However, even though she spent hours researching the rules surrounding cancellation of debt income, she found no relief for her situation.” Seems like the sensible thing to do would have been to consult a professional tax preparer.
    “Thompson…is indignant about a policy that forces disabled borrowers like her to trade one type of debt for another.” Why, exactly? The taxes on $91,000 are a small fraction of the original loan. I would think she’d be pleased that the taxpayers are forgiving such a large debt.
    “We’ve reached out to the IRS a number of times…but to date haven’t gotten a response.” As if the IRS is going to comment publicly about an individual’s tax problems. What next, you’ll call someone’s doctor and expect him to her comment on that’s person’s health concerns?

    • Gerri Detweiler

      She has been working with a tax professional Joe.

      And we did not reach out to the IRS to comment specifically on a taxpayer’s question. Instead we reached out to their public affairs department with a list of common questions we are getting about 1099-C forms. We have not received to responses to our emails or phone calls.

      • Joe in Seattle

        That is interesting, I hope the IRS will follow up with you. Thanks for the follow up.

    • Kwiatowska

      When it’s an institutional problem that affects many people, it’s not an individual’s problem anymore, but the problem of anybody who ends up disabled and in this situation. You have no idea how it feels like until it happens to you. And you probably wouldn’t want to know…

    • John DeSombre

      Great, Joe, blame the disabled for becoming disabled and no longer able to work to repay a loan–shame on them–and then to search for answers to questions, how dare they? Joe’s feeling cheated, wait while I wipe away a tear. First, you don’t want to become disabled, it’s not a cakewalk. Second, before you criticize someone less fortunate, walk a mile in their shoes, or take a walk on the wild side, and try to imagine it. The IRS probably maintains this nightmare just in case the disabled person comes into money sometime in the future, so they’ll have something on the books to recover. The fact remains, however, that a loan is forgiven or discharged and the disabled person often moves from one nightmare scenario into another, which comes as a surprise to most, with little or no guidance from the IRS as to how to proceed. I was indigent and on SSI and Section 8 at the time of the discharge of my law school loans (so my liabilities were greater than my assets and I had no income other than the forgiveness amount), so it appears I’ll be alright. This appears somewhat clear now, but it took me some time to find out information on the Internet, which I’m able to navigate, and I can read and understand the U.S. tax code, which not every person can do. Why not consult a professional? If you’re disabled and do not have the resources to pay back your student loans and are suffering other financial difficulties, it’s not easy to fork over money, which you may need for necessities, for advice you’re uncertain will help. Lastly, next time you’re feeling curmugeonly, put a little love in your heart, and try a little compassion, you’ll be glad you did.

      • Shirley

        Hit the nail on the head there John. I receive SSDI, NOT SSI, and when combined with my husbands’ machinist wages, somehow, some of the SSDI payment IS taxable. Couple that with my recent cancellation of student loan debt due to permanent disability and the nightmare scenario you a referring to is our life right now. We had already encountered this tax situation when the disability happened and we lost the home we had purchased. In that situation, we did prove indigence. However, now, even though this is not a huge debt, we are people who live paycheck to paycheck. I’d just like to know how a federal agency can cancel a federal debt, but then a different federal agency views that cancellation as income for that tax year! I suppose they have a case for the fact that I did have that money at one point in my past – but isn’t that where the total and permanent disability plays a role in current life? Trying to find some measure of common sense where none exists though is a fools’ errand…….and with the government, it never makes sense….not to me at least!

        • http://yahoo.com Terri

          Hi John I was trying to say that my leg is worse the hadn’t was in the way of my thinking and my fingers type faster than my mind sometimes..

      • http://yahoo.com Terri

        Hi John so how did you come out while u were on SSI and section 8? I would like to know for I am on SSI due to a work related injury that happend to me on 01 and I didn’t get my SSI until 06 due to more issues with my leg it hadn’t gotten worse then and now I have to face this 1099-C because all my loans had been discharged but before that I had placed all of them in one spot so I could keep tabs on them better.Now after after almost 10 yrs or so I get this 1099-C they should let ya know just what you are facing when they discharge them so u can be ready, I was in shock all day yesterday and I don’t have the funds to pay back live off of very little, I didn’t see this snowball coming when I got hurt and I had plans to work at our prison thats why I went back to school for a BA in criminal Justice life is fun ya never know from one day to the next whats going to happen. Did you file a 982? I was told to do that today even though I know SSI isn’t taxable don’t know so I am going to see a tax individual for help..I have to take all my paper work in that shows when I became disabled and show what asses I have which is none just a old truck which I need to get to Dr’s and ER when I have to go..I hope you will read this and let me know..Terri

    • Sarah

      Yes all other types of debt are forgiven by way of bankruptcy. The taxes on forgiven student loans are not small in comparison to the original loans. They are normally forgiven after 25-years, during which time they have ballooned to twice their size. My loans generate interest at over $10,000 per year. That’s over $25,000 at pay off time, but with the recapitalization of interest. It will double the loan amount. By that time, tax on the forgiveness will be huge.

      • Sarah

        $250,000

  • http://www.cashadvance.co.uk Darren E

    That’s a sad situation but it’s true, debt forgiveness is considered a windfall, i.e., taxable income unless otherwise stated by the IRS. The Tax Code is an incredibly complex set of statutes and regulations and it’ll take a wiz to figure out how to navigate it; but that’s why tax attorneys are paid the big bucks…

  • Jan Jones

    I have to admit it bothers me that people who have gotten themselves into debt up the wazoo to obtain a higher education feel that their debt (including taxes for cancellation of debt) should just be forgiven if they can’t get a job, go on disability, etc. I don’t believe other types of debt are forgiven for those reasons (mortgage, credit card debt, car payments). My husband and I AND all three of my kids worked extremely hard to pay college tuitions for the kids as they came due. It took our kids a couple of extra years to get their bachelor’s degrees, but they did it. And my son gets his master’s next month. We pounded it into their heads that they didn’t want to come out of college with student loan debt that they might NEVER be able to pay off. I guess I almost feel like we’re being penalized for trying to be fiscally responsible while at the same time trying to educate our children. It WOULD make me feel better if the government would just ‘lend’ me $91,000 dollars, and then tell me that all I owe is taxes on that money. But I don’t suspect that’s going to happen anytime soon, is it?

    • Jessica

      You’re acting like it was her fault that she got sick. If one of your three OUTSTANDING children got sick and was unable to pay their bills would you tell them to suck it up and figure out how to pay them totally on their own? No. I think I’m quoting Rick Perry, but C’mon, have a heart.

      • PollyAnna

        Exactly, Jessica. I get tired of hearing this kind of heartless response. Inevitably, these people direct their rage on the average citizen who has the audacity to get ill or fall into other circumstances beyond their control (job loss, etc.). Do I see this rage being directed towards the system so full of systemic, deliberate fraud? Of course not.

        • Robyn

          So Jan is upset that people who are in debt up to the ‘wazoo” somehow get a windfall. Not exactly how it happens. I am a borrower as well. I borrowed 11,000 over a six year period. Got a BA is Music. Taught private lessons and did all that music “implies” until 1996. Paid monthly payments. Got a divorce and noticed that my income was not going to cut it. Plus I needed health benefits. Continued working but returned to school to pick up the “education” block of the music degree. Got it but had to borrow another 11,000. The tuition had gone up that much in 8 years. So I was facing 20 something thousand in loans and it seemed fine to me. I worked and paid…paid and worked. Took a couple of forbearance. Upon restarting payment, I had to pay $500.00. I let them debit it out of my account. Had just started my new public school teaching job. Started out in the negative. So long story short, Sallie Mae suggested a consolidation. I did it. Then the loan total rose to $55,000. Interest $27,000. So while I feel it is my responsibility to pay the borrowed amount, it is difficult to swallow paying penalties and fees that I had no idea were possible. This nightmare would have been long over. I always kept it to myself. Afraid that people would speak of me just like Jan is speaking of people above. My daughter started college on loans, grants and the rest from us. Then her sophomore year came. My husband took out a parent loan to keep loans out of her name. Now as she was approaching her Jr. year, we had no options left except to borrow…..Sadly, since her major is Dramatic Arts, I told her the truth about the loans. In a fairly perfect world, borrowing through student lenders is risky. In this imperfect world, it can destroy you. I feel guilty encouraging her to borrow. We spent many days exploring options. Final decision …she is taking the next year off to earn money for tuition. Of course her dad and I are going to help as much as possible, but it is just too much. She has 3 jobs and so far is working out pretty good. aside from doing something horribly immoral or illegal, this is the best she get do. If only the student lending practice had to follow the same rules and regulations of other lenders. But they don’t. It’s predatory. Hope things go as well for Jan’s grand children….that is a generation to worry about.

          • Dana

            You are absolutely correct. These loans are blatantly predatory. It’s an abomination that it’s occurring that this level for the integrity of purpose to pursue an education. What other options do we have? I am 43, borrowed less than 20 K, but by the time my loans are paid, I will have paid 48,000. Almost double. That sounds like mafia rates to me. I am no encouraging my son to go to college, but to learn skills and live by his wits. At least that way he will not have what livelihood he does earn stolen from him. What’s the difference? The loss is the same regardless. Oh, and I didn’t mention that I, too, am now disabled. And will most likely default on my loans by Christmas, at which time, my interest and fees will extent to at least 20%. I have no delusions that me and my husband will live in poverty in our old age. Do you know what it’s like to have biscuits and tomato gravy for dinner. Cause it’s all you have. And there will be days you will probably have days you don’t eat at all. All we have for transportation for my husbands job is a large van that we paid $800 for, but since we live in a rural area, it costs $20 a day (no joke) for him to drive to work. And on his only day off, I have to use it to run errands and grocery shop. I can’t work due to disability, but couldn’t regardless because I have no transportation. I graduated with honors and voted most likely to succeed, but my husband dropped out of high school and can still make more money than I can cutting meat and/or doing tree work (which killed my uncle last October when he fell out of a tree). Oh, life is so full of opportunities! I enrolled at a top-rated one year advanced program masters level program to be a masters level social worker, but my little brother died 5 weeks into the program. It grieved me to the point I had to drop out, and it cost me over $5,000. Life is so easy, isn’t it? I remember my professors asking us to write an essay on where we see ourselves in 5 years. This is the total opposite of what I expected. I paid school loans off I took out in the late 80′s, but these loans are different. I had no idea how different they were. But like everything else, greed has consumed our nation, and I cannot imagine how anyone except the young and foolish could be so optimistic. So go on, be idealistic like I was. I made more money before I went to school, but my generation was told almost daily that an education would make your life easy. We believed it, and many people succeeded, only to now have our kids selling their souls for this education we so believed in. You really believe costs of risen that drastically for universities? Maybe. But ONLY because there was federal money to be gained. That’s the true reason. What the government probably truly meant for the good of the masses, the entities involved in making it happen manipulated the process for their benefit just as far as they could possibly take it. And they love it when we point fingers at each other. I refuse to do it. The problem is systematic and has been evolving for years. I fear for our future, and for our children’s future. I got pregnant by accident at 30, but I had no problem never having children because I knew this corrupt world I would be bringing them into. But now that I do have one, my heart lies in doing what I can to improve his future. And it does not include enslaving him to predatory school loans, although he comes from a long line of college educated people.

      • Deborah

        I agree with you in so many cases Jan, the government gives handouts for so many things. I too worked hard to get through college and raise my sons by myself. It did require me to take out student loans. I am a nurse and worked extremely hard and long hours to just support my kids, I know, not your problem, it is what we do to raise the kids we chose to have under whatever circumstances we chose to have them under. I had no problem working this hard to provide for them. I did, however, get diagnosed with two types of a incurable, inoperable brain cancer for which I had to go on disability for. I have expensive treatments and many doctors bills etc. I still have a son at home. You probably have no idea, but even though I did get immediately approved for disability because I will die within a few years at best, it is 6 months before I get anything at all That is the standard waiting period. I’m going to guess that you wouldn’t do so well with no income for that length of time either. I did pay into the social security system, so really, that is my money too just as it will be yours when you choose to retire. There is not realistic way I could pay back my student loans. They recommending canceling, I did not request it, but did take advantage of it when offered. Really no different that accepting a grant for college in the first place That is still govt. assistance. Taking a tax credit each year for each of your children or taking their college tuition as a tax deduction is just another form of govt. assistance just as having the loans canceled. But at least your not dealing with cancer and all that goes with that. So while I agree overall, all the programs all americans and many that are not even Americans take advantage of is a form of Public Aid/government assistance.

      • Carol

        I agree, Jessica! I happen to be ONE of those people who fall into this situation, Jan! And I did NOT work any less for my degree, either; it took me 17 YEARS to get my Bachelors Degree, Jan, all while undergoing surgeries, illnesses, infections, you name it! Did your PERFECT children do that, Jan? And I am now facing Orthopedic injuries in my cervical (that’s my neck, Jan) and lumbar spine that occur daily; I also have asthma from working in a sick building that my doctor THINKS caused my neck injury! And you have the nerve to call me lazy? How dare you! Why don’t you comment on individual posts instead of calling all of us who have no choice but to go on disability lazy? Believe me, my family raised me with a good work ethic and I am NOT proud of the choice that I felt I HAD to make! Do you have ANY compassion for others?

        • http://yahoo.com Terri

          Hi I am on disability myself I was a property manager for a large apartment building then everyone told me I should go back to school to do something worth while so I went then just before I finished my last term I got hurt bad, broke my leg and ankles in three places, plus the main support bone then I had three blood clots almost died, was in a wheel chair for 2 yrs non weigh bearing and very depressed. The University I was going to talked me into staying and I got my BA from a wheel chair, now I am on total permanent disability and have 65,661.51 to pay taxes on will see a Tax guy this Friday I didn’t have a clue I had to pay on this no one told me or I would have done things different. I am on SSI and I hate it but what else can ya do, my job didn’t carry workmens comp, I filed Bk in 05 on all medical bills that came to 89,000, I didn’t want my life to come to this and to be honest the IRS scares me to death now that I know I owe this.I filed for disability in 05 because I couldn’t work the Dr’s have me on restrictions longer than my drive way, and then with the student loans discharge I started the paper work in 06 it took them until 04-2012 to discharge them. I wonder what my payment plan will be because SSI isn’t taxable and I don’t own a house all I have is a old truck and I live with a brother..What makes me mad is the folks that come to this country get free education and don’t have to pay back a dime on anything.. While the rest of us struggle from one day to the next. I know what its like to eat nothing but patotoes or peanut butter sandwiches Social Security docks me because I live with a family member. Hardships and our co-called gov doesn’t help matters any..I have to have wheels because of lab work med,s in and out of the dr or er all the time because of my legs issues look out folks Social Security is also doing paper work on everyone that is disabled to see if your broken bones or injuries have healed up enough to take ur income away from ya,just sent in mine on the 19th and my condition hasn’t changed to the better it has grown to be worse now have leg ulcers and medical all the time..The leg that I broke is bigger than the other one it swells really high, so I keep it up off and on all day. The IRS don’t care that we all have issues and they don’t care if u have to eat theyjust want their money I may have to see an Attorney on this..I wish we were all unhurt and could work if I could I would love to go back to work doing what makes me happy and thats being around people that love their jobs and freedom to do them..I do have compassion for others lots of for I know just where they are coming from for I am there myself.

      • Barb M.

        Of course it’s not her fault she got sick, but I also think a person can’t have it both ways. What most of you tend to forget that this was tax payers money to begin with and don’t we deserve to get something back? I also feel there could be exceptions as is with this case. She became sick after or during going to school and has extreme mitigating circumstances beyond her control. She can’t work in the field she was trained for, if she is ever able to work again. The loans should be forgiven, no tax liability. Now what I have a problem with is people who are already on SSDI, go to school and borrow federal money with no intention of ever paying it back or going to work in what they were trained for. Our crazy stupid government even allows people who have had loans discharged for disability reasons to go back to school and borrow more!!!! In some instances they will have to make good on the discharged loans, but most don’t. They simply get a note from their Dr. that says they’re able to take the course. Most don’t finish because they find out that if they do, they will be expected to repay the loans AND go to work, and most do not want to give up their government check. These are the ones working the system with our tax payer dollars and it needs to be stopped. The national student loan debt is a joke and can only be blamed on our government because they make all the rules.

        • Leo Filon III

          I’m going to ask for the citations for these imaginary anecdotes, preferably peer-reviewed research articles or government agency (or unimpeachable research foundation) statistics, rather than news- or talk-media pieces or press releases.

          I was a journalist, even in the ’80s, so I know whereof I speak.

    • Deborah

      Actually, other debts are paid off more easily and they are more likely to be caused by faulty spending habits; it is called bankruptcy. Those are pretty easy to get even with a decent income. Student loans are exempt from this.

    • Tressa

      Well Jan

      I have been disabled for sometime now. I have been paying my student loans since 2006. But I can not file taxes and claim interest back on what I am paying on the school loans. Which I paid 633 in 2012 year alone. Is that fair to anyone that has became disabled. I am sure none of these people want to have these disabilities or ask for them. I know that when I could not breath (because of all the environmental allergens in today’s world) I woke up and said I guess today I am disabled and I think I will have a hard time breathing. I feel if there is help for these people, that they should at least ask the questions and get a response in a certain time frame. It is not that they do not want to pay loans back. It is that they can’t and Their lives have gone down a path that they did not see when they took these loans out. Remember that we take to loans out to better ourselves and rely on the fact that we will have great jobs to pay back these outrages debts. Maybe in a perfect world. Until then there has to be relief somewhere.

    • ChrissyinCT

      Wow, I surely hope you never become ill. I think you should get down on your knees and than the higher power that you have your health and your children do to. Obviously, you have no idea what it means to be sick and have this thing hanging over your head. It is impossible to predict into the future and know whether one will become ill or not. So to act like you are better than everyone else because of the way you did things is just truly ridiculous. We have all worked hard, myself 30+ years. So don’t try to make me or anyone else here out to be some dead beat who goes on disability because we cant find work. I lived in $47 a week unemployment for the 14 mos it took me to get it. Let’s see you try that. Without getting into HUD housing and foodstamps (which was a degrading thing to have to do) I WOULD HAVE BEEN HOMELESS! You have alot of nerve!

    • mel dj

      You know Jan, people don’t just decide to go on disability instead of working. I was working and paying my loans. I broke my back while working and had to have rods put in my spine and cages where discs were. No way in hell did I ask for this and to be unable to work. I receive $14,000 per year in disability payment – that is taxable – instead of the 85,000 I made prior to breaking my back. I can’t pay my loans, or much else for that matter. My loans were discharged due to disability. During this process, there was absolutely no mention anywhere of the loan and interest amounts being considered taxable income. I got the 1099C and nearly freaked out at first the amount, then the fact that I had to claim this on my taxes. I owe an exorbitant amount to the IRS and State Dept of Revenue due to this. I have no other recourse. I have no way to pay the debt. Even a payment plan is too much for me because I’m stretched financially to the breaking point. By the time all the penalties from the government accrue, I’ll be in worse shape than if I had let my loans go into default. Again, I did not ask for this. People who are on disability are on it for a reason. They are not better off being on disability that working. I believe all disabled people would agree with me. I read all the tax code and really, unless you don’t own anything – house, car, etc…- there is no way out of this situation. I’m a tax accountant, so I know that I’m screwed. Next time before being so scathing, try putting yourself in our shoes.

  • Jim

    I grew up thinking it was right to follow the rules and always thought that, of course, I should pay back anything I owed. I even paid extra to pay off my loans as fast as possible, forgoing luxuries like Starbucks coffee, fast food, a cell phone, etc.
    Now, I feel like a fool!
    Rules are for suckers. Basketball a non-contact sport? You have to tag the base to get the runner out at second? Fair play? Only for losers!

    • Antony

      Yeah, cancer patients get all the breaks.

      • Annie

        Spot on Antony.

      • Felice

        Hmmm. Think so? When it happens to you, let me know about the breaks you get.

        Signed,
        Cancer Survivor w/out breaks!

        • Javier

          Felice, you should be commendd for your remark.
          You can’t have cancer “forgiven”.

          Signed,
          Another cancer surviver w/o breaks!!

      • tammy

        Antony, your remark of cancer patients get all the breaks….do you mean that you and I don’t get a break because we don’t have cancer, pretty cold hearted there sir….we are lucky if we don’t have cancer, remember if she could work she would have more money to live on, but NO she has to live on disablility so I am happy to see her have a break so she can worry only on getting healed and the right treatments and now have reduced stress so she can heal quickly and relax….we all have problems but sorry I don’t feel if someone has cancer is lucky, I thank God I don’t have cancer…sorry this remark got me so had to write you.l

        • Sharon

          Really tammy? Antony’s remark was SARCASTIC! He was NOT really agreeing with Jim!

          I know the “tone” of text is quite frequently misunderstood, but come on, that was pretty clear.

    • Sarah

      Some people cannot pay off their loans early, because their income is too low. In order to pay off my loans, I need $150,000 where am I going to get that kind of money. By the time of final discharge, if that ever occurs, I will owe around $300,000. People who whine about others whining about student loans don’t understand that there is a black cloud floating over their heads, preventing them from living a normal life, as any all income they receive from a job will be sucked up by student loans, when many of those people are earning minimum wages with colossal student loan debt.

      • http://yahoo.com Terri

        Hi my final discharge is 65,661.51 cents and now I find out I have to pay taxes on this I wish they would put this in print when ya take this disablity out because I would have done something different sonow I am worried on how I am going to pay this off because my income is 473 a month thats all and on SSI you cannot file taxes I haven’t had a job since 01 when I got hurt was in a wheel chair for almost 2 yrs.. I know how you feel we need help with this someone out there must know..

  • http://www.bankruptcylawpros.com Wayne

    There is also a way for her to bankrupt out of IRS debt when the debt is 3 years or older. The IRS can negotiate a payment plan for her in the meantime. She can also file for Chapter 7 bankruptcy to help prove insolvency for tax filing so that she can get out of the 1099-c that she received for the cancelled debt.

    There are plenty of options here. It would be nice to read a follow up and see what happens.

    • Gerri Detweiler

      Thanks Wayne. We are getting some good suggestions for Kim here.

      • cordia

        I am so scared. It is difficult enough for me to make it through one day at a time and at times my thinking is hazy. I am disabled and am in the process of getting my loans forgiven and I have no clue what I am going to do if that means all that will be taxed as income.

        It trully makes me wonder if suicide is the answer. I live on social security and disability income..what am I suppose to do?

        When I became disabled I fought it tooth and nail because I wanted to work but my body and mind failed me. In fact, Im super vulnerable as I just had some tests, again, to see if I had cancer. I have plenty of other health issues. It really hurts that people think some people do this on purpose. I have had such a difficult time accepting that this is my choice.
        It makes me sad that people are not more compassionate.
        I honestly dont know what I will do.

        • http://www.credit.com Gerri

          Cordia – I am so sorry to hear what you are going through. Please don’t assume the worst yet. You may qualify for the insolvency exclusion that allows you to avoid paying taxes on the cancelled debt. Please talk with an accountant who has experience with 1099-c forms asap to find out. If you cannot afford a consultation with a tax professional, find out if you can get help through the Voluntary Income Tax Assistance program.

          There are times when it makes more sense NOT to get your student loan debt cancelled due to disability. You may be better off getting into IBR – Income-Based Repayment – with a low or zero monthly payment, and then forgiven after 20 or 25 years. Have you checked out IBR as well?

          I know this is a difficult time for you. Please reach out for help if you are feeling suicidal: National Suicide Prevention Hotline. There are plenty of us who want to see you get better and find a solution to this debt problem, so don’t focus on the others.

    • http://yahoo.com Terri

      Hi Wayne what kind of payment plan can IRS do for ya when you just found out that you owe 65,661.51 cents, my loans were finally discharged in 2012 because I am totally permanent disabiled and when ya apply for that u cannot work at anything I didn’t plan this but now I seek help.. I am seeing a tax guy on Friday to drop off some papers hopefully he can help me and I did file charpter 7 in 05 on medical bills had tons of those..

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  • Christine

    In the meantime, what do we file? 982? It would be better to get the student loan NOT forgiven and attempt to request hardship forbearance on it until you die under the option that allows you to put the loan into hardship forbearance if you don’t make enough money to pay monthly installments. When one thinks that the debtor is a slacker, it is important to note that my original loan debt, upon which I paid for many years, was less than 50K. However, interest acrues on interest and now I owed 113K, which was just “forgiven” due to disability.

    • http://www.Credit.com Gerri

      Christine – You may qualify for the insolvency exclusion which could allow you to avoid paying taxes on some or all of the cancellation of debt income. Read Publication 4681 to see if you do. If so, you’ll file Form 982. If you aren’t sure, it would be really good to get help from a tax professional.

      Also, good point about the current amount owed versus the original debt. An already expensive college education can cost more than double that when all the loans are finally repaid (if they ever are!)

  • Colleen

    I will want to continue to follow this as well… I am also disabled and have not been able to pay on my student loans since 2006 (I graduated in 1994). My conditional discharge on my student loans is ending this month, per Nelnet. I asked the rep if the cancelled debt falls under the 1099-C IRS rule and they said yes but could not tell me if I would be taxed on the amount cancelled. So, thought I’d do some research and found this article and the comments. Yes, a nightmare. I will need to disregard some of the angrier comments (not something I need to add to an otherwise difficult life/situation) but I do want to get more info re: how the IRS handles this. I own nothing (apart from my thrift store furniture and my computer & internet service – my link to the world and how I pay my bills, get the news, etc.) I rent and do not own a car. I have $25 in savings (that is required to have a checking acct with the credit union I belong to). I have a meager amount of credit card debt that I am trying to slowly chip away at, but it tends to go right back up when I pay winter utility rates and or medical bills and have to use the credit card to buy food. I do not receive any kind of welfare assistance (i.e. housing, food or cash). I am on Medicare and receive SSDI. I’m not “really” making ends meet now, so this additional tax burden concerns me a great deal. The cancelled debt will be almost triple what I actually took out in student loans, due to my inability to pay for so many years, so yes, this does concern me. Really concerns me. I don’t even have the money for a tax professional right now, but will need to find a way to pay for one. Really looking forward to more info from this. Thank you for the info.

    • Gerri Detweiler

      Colleen – I am glad you found the post helpful but also don’t want to alarm you unnecessarily. It sounds like you may qualify for the insolvency exclusion. If you do, you won’t have to pay taxes on the cancelled debt to the extent you are considered insolvent. I’d suggest you go to the IRS website and read publication 4681. There is a worksheet you can use to calculate your insolvency as of the date the loan was cancelled.

      If you do qualify, then keep that completed worksheet handy for next year, when (it sounds like) you’ll get the 1099-C.

  • Terri

    What about applying for free legal aid with the local free legal aid organization? I would ask them about bankruptcy and about if an IRS debt can be discharged in bankruptcy after it’s 3 years old.As I understand it,bankruptcy can discharge student loans if a person has total and permanent disability and/or death. I’m not sure how they discharge IRS debts.

  • john slattery, ea

    using the 982 insolvency form can also include the tax liability Fed and State
    to reach insolvency don’t forget to include the student debt
    A lot of this is how you handle reporting the debts

    SS under $25,000 SINGLE AND $32, 000 = NO TAX ACCORDING TO THE FORMULAE
    BUT the 1099c pushes you into the taxable field so you do have to file a return

    Any Fed Tax Liability and the ability to pay comes from a 433a form the IRS requires
    and if no funds available – will CODE 53 uncollectible. This reviewed annually.

  • Signe

    I am in exactly the same situation right now. I was an associate attorney with a great job, but in Feb, 2008 was struck with disabling rheumatoid arthritis. Doctors tell me I won’t work again, as the disease is severe and progressive. My husband and I just filed our 2011 taxes (married, filing jointly) and received a refund because we moved.

    After filing, I received a notification that my student loans of $125,000 were forgiven, provided that I was still disabled in 3 years. Then I received a form 1099-C, dated 12-29-11. I am sickened to say that it appears we will have to amend our return, stating the forgiven debt as income. This will be an impossible financial nightmare for us, adding huge stress to an already stressful situation – my illness, pluss the fact that we are trying to raise two autistic children.

    I just don’t understand – the federal government has twice declared me completely disabled, once when I began to receive social security disability (deemed disabled to the point of being unable to earn money in any job); and second, by forgiving my student loans.

    I have absolutely nothing to pay this with. I receive social security benefits and long-term disability from my old employer, but all of this goes to paying for my medical bills, and for our childrens’ medical needs.

    Additionally, because the date canceled is 12/29/11, we will owe back all our refunds, which we already used to pay down debt, plus the tax on the canceled debt.

    Is there anything that can help us?

    • http://www.Credit.com Gerri

      Signe,

      I am so very sorry to hear this. It sounds just awful for your family. I would recommend you at least talk with a tax advisor to find out whether there is a way to reduce or eliminate the taxes you owe as a result of this cancellation. And also be sure to speak up and let your elected officials in Washington know what a hardship this has created for you.

  • Signe

    Thank you, Gerri, for your kind words. We are working with our tax advisor now to see if we can reduce our tax liability to the extent that we are insolvent. I read your advice to Colleen above and read Pub. 4681 and the instructions for Form 982. We believe this will help us greatly.

    Thank you for your article. It has been so helpful to us!

    • http://www.Credit.com Gerri

      Signe –

      Wonderful! We really need to thank Kim since her story is the one that prompted this one. Glad to hear that’s working out for you and I hope you find some relief for your RA.

      Gerri

    • Gerri Detweiler

      So glad you found it helpful! Will you let us know what happens?

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  • Missy

    Was there ever a follow up on this story. My mom is in a VERY similar situation and I am trying to help her by researching this matter. Thanks!!

    • http://www.Credit.com Gerri

      Hi Missy –

      I am not sure what kind of follow up you were looking for…? The IRS does considered student loan debt cancellation due to disability as taxable income. In order to avoid paying takes on that amount, you must show the IRS you qualify for an exclusion or exception such as the insolvency exclusion. Have you taken a look at IRS publication 4681 to see whether she may qualify?

      • Missy

        No, I have not but I will now. Thanks for pointing me in the right direction.

  • Ngt

    I am applying for my loans to be canceled due to me being disabled and on ssi. Will they send me a 1099-c if I am on ssi and not ssdi? Is ssi taxable?

    • Gerri Detweiler

      It doesn’t matter what the source of income is. The lender is required to send the 1099-C if $600 or more of income is cancelled. Whether or not you have to pay taxes on that cancellation of debt income is not a matter of what type of income you receive, whether from SSI or elsewhere. You may not have to pay taxes on the income listed on the 1099-C if you it’s not enough to put you above the threshold where you have to pay taxes, or if you can show that you qualify for an exclusion or exception which you’ll find described in Publication 4681.

      I am not a tax advisor, however, so please don’t take this as tax advice for your individual situation. Get help from a tax professional with experience in 1099-C matters to help guide you through this.

  • Ngt

    Thank you for the reply.

  • terry

    i’m appalled by the lack of compassion of some of the individuals in the posts. total narcissism! a health care crisis can wipe out a life savings, cause a home to be foreclosed on, and bankrupt one in a matter of months, as well as ruin perfect credit. the individuals who requested discharge due to disability are not deadbeats, and the discharge isn’t granted to every candidate, even those who qualify. this is a last resort option, not a method of weaseling out of an obligation. to the individual that crassly stated that the cancer patients get all of the breaks, this is reprehensible, and offensive to all of the patients who are survivors, and to those who suffer.

    • cmc

      thank you for saying that! So many people are so coldhearted about what they deem a “handout” in this election year. I paid into my social security fund, and am now collecting it and I am so offended by some of these replies. I know I should ignore them (as Gerri does!) but it just enrages me….

    • Debra

      I can’t believe someone said that the cancer patients get all the breaks. OMG I’ve had 4 surgeries and chemo and radiation and gone through so much pain. Unreal. That person will end up with it someday for that.

  • Tammy

    I took out a $2,500 student loan 1985 in 1986 was in a major auto accident, had 3 back surgeries with rod and screws, 2 neck sergeries, knee surgery and shoulder…..I am crippled up from surgeries and will be rest of my life…I have been on social security disability since 1997, now that law past they have been taking 15% of my disability and has taken $6,980 from me so far and said with intrest it, I have a $2,600 balance left…to remind you I took out a $2,500 loan….I am now showing my social security paper to them again showing how long I been on it and how many years….I think they should give me money back since I was on disability well over 5 years it has been 25 years on it…I am hoping that this works, pretty hard for them taking 15% and try to live on the balance, food gets hard to buy anymore…I hope that someone out here is in my same shoes that can tell me if I can fight them? thanks all and thank you for reading this.

    • Tammy

      have to correct this…been on social security disability since 1987

  • http://Yahoo Teri Weller

    I was diagnoised with MS in 2009 and am on disability. I love to think that I will find a job that I can do again with my disabilty. I want to work again as I’m sure we all do. Finding a job that pays enough to support a family and pay of student loans are far and few in between. I got sick before I finished my education. Now I’m thinking of getting my loans dicharged. My problem is if you do you can’t work or go to school again, and with MS you never know whats’ gonna happen. I wanna finish school and get my degree. I recieve 906. a month for disability, my daughter, 567., she graduates in three years and 17. in food stamps, that’s it for my income I don’t want to live like this the rest of my life, I want to get to the point where I can work at a great paying job so I can pay those loans off and still have a life. Right now that doesn’t seem to be a reality in the near future. Also what does it do to your credit rating if your loans are discharged?

    • Gerri Detweiler

      Teri –

      So sorry to hear what you are going through with MS. Have you looked into IBR for your loans? If you qualify, your payments can be as low as zero and it won’t hurt your credit scores. Then if you are able to get back to work your payments will be based on your income. Given that you want to work and continue your schooling, it might be a good option for you.

    • Amy

      Teri – My understanding is that loan discharge does not affect your credit rating. It should simply show as a 0 balance. That’s how my credit report shows. It has the potential to help you obtain credit, because your debt to income ratio will be lower.

      I want to get to a point where I can work, too. Have been on disability since 2002. I had my student loans discharged in 2010, so I expect to get my 1099-C for 2013 taxes. As best as I can ascertain, I am not insolvent because of the equity in my home and in my retirement account (403b), even though I cannot access either (I am on long-term disability from my employer and they don’t allow withdrawal from the 403b, even for emergency. My debt to income ratio is too high to obtain any loans).

      My “plan” is to file the taxes and set up a payment plan with the IRS. After the tax debt is 3 years old, it qualifies to be discharged in bankruptcy, and I have much credit card debt too (it is not from being irresponsible. I make sure all my bills are paid and that means using the credit card sometimes, particularly for medical expenses).

      Or I can get better and go back to work. I would much prefer it this way, but it hasn’t worked out.

  • Julie F

    Julie F Are the 1099c’s sent out in the year in which the conditional discharge is granted, or after the 3 year conditional discharge period has ben satisfied?

    Thanks for sharing the knowledge you’ve gained from walking through this challenging experience.

    • Gerri Detweiler

      Julie – I haven’t seen that spelled out in the publications the IRS puts on its website for consumers. It’s possible that there has been additional guidance but I haven’t seen it, and since I am not a tax professional, wouldn’t have access to it. (My sense is the IRS has not caught up with all the issues that these forms have raised.)

      • Deborah

        they are sent out when the conditional discharge is granted

  • Julie F

    How about those who have received a 1099 answering this question? Did you receive your1099 in the year of conditional discharge….or after having satisfied the 3 year monitoring period? I have spoken with a Nelnet rep.who said it’s after the 3 year period. But their website says the ” discharge” is effective once the department determines that the submitted application supports the preliminary conclusion of total and permanent disability.

    Thanks Gerri and everyone else.
    Julie

    • Gerri Detweiler

      Julie – This is a really important question. Since the IRS won’t answer our queries on this issue let’s home we get some responses from readers.

      • Deborah

        I got mine at the end of the year they gave me the conditional discharge which was December 31, 2011. My 3 years won’t be until next December 2013

        • JC

          Hi. I received a conditional discharge(via nelnet) in March of ’12. I just got a 1099 in the mail for 103,000 a week ago. My conditional discharge will be complete in March of 2015. I am not sure, but I think I am in deep water over this whole tax mess. I didn’t see this coming, and as I have NO income whatsoever, I am not sure how I am going to deal with this.

          • http://yahoo.com Terri

            Hi you will need to see a tax individual right away and maybe file a 982 so u could maybe get out from under your debt, my loan was discharged March of last yr but I just got the 1099-C yesterday so it scared me to death for I am on a fixed income something like 400 a month give or take and I didn’t plan for my life to end this way. I got hurt on the job in 01 was in a wheel chair off and on until 02 then a non weight bearing cast the rest of 02 and in 03 I couldn’t find work was still in school after graduation in May of 03 put all loans in one place so I could keep tabs on them, I placed them with a company called ACS and they gave me the run around so I sent all DR’s reports and papers to the Board of Education while I was looking for work. Then in 05 I started on the discharge now I wish I hadn’t I should just have put them else where.Then in 06 they found me totally disabled because of my injury that left my right leg bigger than the left and I had blood clots so I am on med’s and pain med’s and stuff for leg ulcers that I now get all the time because my cast was on to tight when I broke my ankles and leg and the main support bone which is now all metal. I don’t get food stamps, I don’t get extra help just SSI and like I said its not much but I do okay I guess I don’t like it but I have learned to live with it. So go see a Tax indivdual right away borrow the dough get the paper work done..I have a meeting with one tomorrow so show that I don’t have any assets and I have to show what I spend on food, personal stuff and gas and out of the pocket for med’s and co -pays normally I have about 50 bucks left until the next check and u have to have some to keep the account open with the bank..IRS doesn’t care what you have just as long as they get their money and u can thanks the kid in office for making all these changes since he took office in 08 the first time.Its going to get worst to..

        • Jeanie

          Hi, everyone. I received my 3-year conditional discharge in 2012, and I received the 1099-C that must be completed with our 2012 taxes, in January. Like all the other posters, we simply cannot afford to pay enormous taxes due for the forgiveness of my loans. Like everyone, we, too, worked very hard all our lives, kept paying on my loans while working. Neither of us ever thought we’d end up disabled in our early 60s and not able to work. Trying to live on only disability (we have no pensions or IRAs) is so hard; quite honestly, I don’t know how we’re doing it. The household and medical bills, meds, physical therapy (I’m not on Medicare, and have no insurance) – all of that must come from our disability checks.

          We already have a lien on our home from my private EdCash loans. And we DID everything we could to pay on them, until the interest and fees became exorbitant, and we could barely pay our heating and electric bills. It took me 9 years to finally get my BS in Education, due to helping my aged parents and our child, who has a genetic medical condition. After graduation, I graduated summa cum laude, but was offered only temporary sub jobs. Age discrimination is a harsh reality, although I didn’t expect it in that line of work. Then, after the economy tanked, I was lucky to find an office job paying $11/hour. I worked so hard there, that my spine was adversely affected, and they let me go. I’ve now had two cervical spine operations and am in pain! It makes me so angry that some people think that disabled people do not want to work! I went to school in my 50s to be a teacher, which I love doing, and expected to work until I was 70! I try and forgive people like those complaining about us, since they have no idea what we go through – they have NOT walked in our shoes.

          THANK YOU, all of you who have tried to help each other through your kind comments. I can only hope that the tax laws are changed to help people who are permanently disabled. One more question – I was on the IBR plan prior to applying (and obtaining) the forgiveness of my federal loans. Someone said that may be preferable if you have no other income. Should I ask to have the IBR plan reinstated? Can I do this, even though I’m disabled? Like others, these debts are so overwhelming, I get extremely depressed at times and hope I can get through it all… I pray for God’s mercy for everyone.

          • Gerri Detweiler

            Jeanie – Thanks for sharing your story and remaining positive despite what you are going through. Have you checked to see if you qualify for the insolvency exclusion so you can avoid paying taxes on the cancelled student loans? If so then that may be the best way to put that behind you.

    • Amy

      My loan was conditionally discharged in 2010 and I didn’t get a 1099-C. Come to think of it though, they may not have my current address. Hmm.

      • Gerri Detweiler

        Maybe that will happen when it is finalized. In the meantime, you can review the info about about the insolvency exclusion and figure out if you qualify.

      • http://yahoo.com Terri

        IHi Amy they will find you and then you’ll get a 1099-C just like the rest of us..

  • janice

    I completed my 3 year monitoring period in March of this year and expect to receive my 1099C in January 2013.

  • Julie F

    Thanks for your update, Janice. Now the confusion continues to build as I just began my monitoring period and the Disability Discharge department of.Nelnet told me that I will receive the 1099c in January 2013……just 4 months after the beginning of the monitoring period.

  • Montecella Daniels

    Hello everyone, so sorry your’e going thru this and believe me I understand!! I know its been awhiler but if u see this I really need help. I was a respiratory therapist for 26yrs before I was stricken with 5 different chronic autoimmune diseases. So to the lady with neg comments I worked very hard and don’t ask for hand outs. I deserve what I put in when I can no longer wk- I had a tax debt frm a business when I fot sick. Tried bankruptcy, pqyments were so high, I couldn’t keep up and hm was even foreclosed. Student loans found me totally & perm disabled so shouldn’t the IRS cancel out mydebt too? A certified letters waiting @ my post offc to pickup Monday. I’m sooo scared. I have nothing & need my little disdability! Will they garnish that too!! Pls respond if u can advise me.

    • http://www.credit.com Gerri

      Montecella -

      We have moved your question over to the Credit.com forums where others can weigh in. You’ll find it posted here.

  • Javier

    Congratulations to Gerri Detweiler & the balance of the Editorial Team for an excellent blog. I appreciate the candor of all who participate.

  • Melissa

    I teach in a low income school district and earned the 5000 forgiveness. I received ZERO notification of this in 2010 and now the IRS wants me to pay back taxes. Seriously, this is a “perk” for working in this type of situation. What do I need to do?

    • Gerri Detweiler

      Melissa,

      Student loan forgiveness granted for teaching in low-income areas is typically not taxable.

      Did you ask the person you spoke with at the IRS specifically why you did not quality for relief under Internal Revenue Code section 108(f)(4)? (it is described in IRS publication 970 chapter 5.)

      You may need to speak to someone higher up at the IRS or get help from your Taxpayer Assistance Center. You can research this issue before you get there and hopefully get someone who knows what they are talking about.

      If that doesn’t resolve it to your satisfaction, then I would suggest you talk with a tax professional. I assume you normally prepare your own tax returns or you would have already done that, but it wouldn’t hurt to ask around for a referral to someone who can help you for a reasonable fee.

      Let us know what happens!

  • DP

    I went through this recently and contacted a tax accountant who is a friend of mine. Her advice to me was this, but it is strictly based on my personal situation:
    Since I receive non taxable long term disability (I paid premiums after taxes), and my SSDI income puts me under the taxable amount I should NOT file for forgiveness of my 12K remaining federal student loan. That extra amount would place me over the SSDI taxable limit which would not only make the loan amount taxable it would also make a portion of my SSDI taxable, AND I would have to report the taxable income to my long term disability company which they would use to lower my monthly benefits. Having to already support my family in less than 50% of my pre-disability income I cannot let this happen.
    Her recommendation was to request a yearly forbearance due to no taxable income even though the US Dept of Ed keeps sending me the paperwork for forgiveness. I have no problem doing this as I have already paid over $30K toward a $19K student loan over the years.
    My disability was not my fault, after 4 surgeries and numerous specialists I believe I have done everything to get back to work and will continue to try. I don’t consider this taking the easy way out, I have more than paid back my loan. I also placed my house into a non revocable trust fund for my children to be released upon my death. Legally I don’t own it so it cant be attached for my debts but my children and I have a home for life.
    There are a lot of factors in my situation that may not be present in yours but I highly recommend speaking with a tax accountant specifically, not just the tax person at the corner, before anyone decided to apply for forgiveness of any loan as it may well effect your life more than just canceling a debt payment of a couple of hundred dollars a month. Good luck

    • http://www.Credit.com Gerri

      DP – This is great information. I agree with you – it’s a good reason to get professional advice before making a decision like this.

      Gerri

    • Sarah

      When you put your loan in forbearance, you are extending the period of forgiveness. You may be able to get forgiveness due to a disability, but you will be ending up with a larger problem at the end. I think you should get a second opinion.

  • Doug

    Does anyone know if the interest on a discharged student loan is taxable? I am also disabled due to a stroke. I used forbearance for a few years and the interest is more than the principal. I have searched on the internet and can find no definative answer to this.

    • Gerri Detweiler

      Doug –

      i am sorry the article was not clearer to you. I was trying to point out that there is no specific exclusion for debt cancelled due to a disability discharge. So unless the taxpayer qualifies for another exclusion, such as the insolvency exclusion, this cancelled debt is likely taxable. I wrote more about this topic in this article: Just Received a 1099-C? Don’t Freak Out!

  • D

    Wow. Reading all this is scary. My conditional discharge was approved early in 2009. I received my final in 2012. Have not received any tax forms. Didn’t know about it. I don’t remember if the the discharge application forms TELL applicants about their tax liabilities; but I was completely in the dark about it. Leukemia twice now; and an incurable brain tumor. After reading some entries here, I went to the IRS site and read the pub and looked at the form. It asks for date the debt was discharged/forgiven. I would not know what to put — the conditional date or the final date. Maybe the 1099-C lists the date? Would it be cheaper to ask for the student debt to be given back? Is that possible? I would just like to pay the house off before I die. My house was severely damaged in a bad hail storm a little over two years ago, but because I had insurance, I did not qualify for any disaster aid. I found out I could not even deduct my insurance deductible from my taxes. This could be funny. I should write a book detailing how 5 bone marrow biopsies, rounds of chemo, two brain surgeries, hail and tornadoes are a cake-walk compared to destructiveness of my own government. Eugene O’Neill got it wrong. It should be “The Taxman Cometh.”

    • Gerri Detweiler

      D – Your health problems sound horrific and I am really sorry you have to deal with this stress on top of all of that. I would encourage you to contact your elected officials in Washington and ask them for help with this IRS question. The IRS needs to clarify the guidelines in this situation.

  • D

    I went to the Department of Education website and followed their link to http://www.disabilitydischarge.com and looked under the borrow FAQ’s. Here is what it says:

    Discharge Processing

    If I am approved as eligible for TPD discharge, when is my loan eligible for discharge?

    It depends on the date your application was received by your lender. If your application was received by your lender before July 1, 2008, your loan is eligible for discharge 3 years after the date of disability. If your application was received by your lender after July 1, 2008, your loan is eligible for discharge 3 years after the date that your physician signs your application. If your application was received by your lender on or after July 1, 2010, your loan is eligible for immediate discharge. However, your earned income will be subject to monitoring for three years from discharge. And, if your earned income exceeds the poverty level for a family of two, your loan will be reinstated to repayment

    How long will the discharge process take?

    The Department’s review of your application can take anywhere from 30 days to a few months, depending on the completeness of the application and the response time of your physician, if it is necessary for us to contact your physician for additional information.

    What happens during the post-discharge monitoring period?

    During the 3-year post-discharge monitoring period that begins on the date the discharge is granted, the Department will check to see if you receive any new Title IV loans under the Federal Perkins Loan (Perkins Loan) Program or the William D. Ford Federal Direct Loan (Direct Loan) Program or TEACH Grants, and will monitor your earnings from employment. Your discharged loans and/or TEACH Grant service obligation will be reinstated if, at any time during the 3-year monitoring period, you (1) receive a new loan under the Federal Perkins Loan or William D. Ford Direct Loan Programs or a new TEACH Grant, (2) have annual earnings from employment that exceed the poverty guidelines for a family of two in your state, or (3) fail to ensure that the full amount of any Title IV loan (under the Federal Family Education Loan (FFEL) Program, the Direct Loan Program, or the Perkins Loan Program) or TEACH Grant disbursement that is made during the 3-year monitoring period for a loan or grant that you received before the discharge date is returned to the loan holder or to the Department (as applicable) within 120 days of the disbursement date. If your discharged loans or TEACH Grant service obligation are reinstated, the Department will notify you. The notification will include the reason or reasons for the reinstatement, an explanation that the first payment due date on a loan following reinstatement will be no earlier than 60 days after the date of the reinstatement, and information on how you may contact the Department if you have questions about the reinstatement or believe the reinstatement was based on incorrect information.

    Are there any tax implications to getting my loan discharged?

    The Department of Education is required by law to report the discharge of any debt greater than $600 to the IRS as income in the year that the loan was discharged, not at the end of the 3-year monitoring period. The Department of Education will also send you an IRS Form 1099-C. This may result in federal or state tax liabilities, depending on your situation. We recommend that you consult with a tax professional to determine how this may affect your personal taxes.

    If the Department determines that I am not eligible for discharge, can I appeal the determination?

    There is no formal appeal process. However, you can reapply for discharge if you believe that your situation has changed and can provide additional documentation establishing your eligibility. Please also see the Dispute Resolution section of this site.

    What happens if I want to return to school and receive new loans after receiving a discharge?

    Please see Student Loan Eligibility After TPD Discharge.

    I currently receive Social Security disability benefits. Does that mean I automatically qualify for a total and permanent disability discharge of my loan balance?

    The Department’s disability standard for discharge purposes may differ from disability standards used by other federal agencies (such as the Social Security Administration) or by state agencies. Eligibility for Social Security disability benefits does not mean you are automatically eligible for TPD discharge.

  • DE

    I, like so many of you, have found myself disabled without warning. I have had to learn new ways to do everyday things, my family helps me to do, what used to be, the simplest tasks daily, etc. I have worked and put money into the Social Security system since I was 16. Today, I am quite old, but, not elderly! I am a middle class person who had a very good job, yet, my family of four lives (and still lives) paycheck to paycheck. Today, I am on disability. I found out about the Total and Permanent Disability Discharge by reading my promissary notes. Hence, I completed the paperwork and sent it along with the medical documentation and upon first review by the Dept. of Ed., my loans were promptly discharged. To all of you that have been through this process, you can imagine how relieved I was. And, like so many of you, I was quite surprised to find out about the taxes that will be incurred as a result of the discharge. Since so many of us are in the same situation, might I suggest that one of the readers of these blogs that has a political background of some sort, go to the Whitehouse’s petitions website located at https://petitions.whitehouse.gov/ and write a petition for all of us to sign that explains a change in the tax law should be considered due to the irony of it all? We are disabled. We have no income. Our own government via the SSA have concluded we are, indeed, unable to continue to work. Where are we getting the money for the taxes? If we still had money, we would still continue to pay our payments like we did before we became disabled. Anyway, if the petition gets signed by 25,000 citizens (if I recall correctly), the government will review the petition and provide a response (positive or negative). For goodness sake, they actually responded to a petition for a death star according to the news! Fortunately, for our world and the universe, they rejected that petition! After reading All of the blogs here, I felt compelled to try to provide a possible option that might improve the situation for us, or, at least for those that fall in our realm in the future. This is being respectfully submitted for review and comment.

    • Gerri Detweiler

      DE – Sounds like a good idea to me. If anyone starts it I’ll post it. (Maybe you can??)

      • KM

        I have started a petition at whitehouse.gov to address this issue. Please spread the word.

        http://wh.gov/yy2O

        • laurel

          I am in the same boat. Looks like you need 100K signature in less than a month. No way they will happen.

        • Geo

          Sounds like a good plan, but we need a better platform than this to get the word out. Any suggestions out there?

        • http://yahoo.com Terri

          Hi Just wanted to let ya know that I wanted to sign what your petition but WE The People wouldn’t allow me to so u might want to see about it

          • Gerri Detweiler

            Terri – I think that may have expired.

  • KM

    I have applied for Disability Loan Forgiveness which has been granted by my lender and I’m now waiting for final confirmation from the DoE (I was told to expect in within the next month). Having read this article before I applied and having done a great deal of research, I’m prepared for a large tax bill. My hope is that I will be able to get it dismissed through the insolvency process (as mentioned in several comments) but, even if I can’t, the large tax bill does prove to be vastly more manageable for me than my student loan debt did. In other words, it was the lesser of two evils. I was using IBR where the remaining balance of your loans is forgiven after 25 years but is also taxed as income. IBR was great because my payments worked out to $0 a month but I accrued a breathtaking amount of interest every month so that at the end of this 25 year period I would have been looking at a tax bill that’s easily quadruple (if not more) what I’m anticipating now.

    I am in the middle of a divorce which will be finalized within the next 60 days. My ex and I separated the first week of January 2012 and I applied for loan forgiveness in July 2012. We are planning to file our 2012 taxes as married but separate (it appears that we are required by law to do this as our divorce has not yet been granted but please feel free to disabuse me of this impression).

    Here’s my question: will his income count against me? It was my understanding that it wouldn’t – that’s the point of filing separately, right? – but depending on who I speak with I’m alternately told that his income will count and that it won’t and now I’m totally confused and concerned.

    The 3 year monitoring period, according to my lender, began in July when my doctor signed the paperwork. So… does anyone know what the deal is here? I’m very worried that my loans are about to be forgiven and then reinstated when we file our 2012 taxes. Help?

    • http://yahoo.com Terri

      See a tax individual first before you all file anything..

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  • Geo

    I received a 1099-C for one of my student loans. It was forgiven in 2012 because I am permanently disabled. The other HUGE loan is still being reviewed. My question is. I qualify for insolvency if I include everything I own. The problem is that I am married and I need to know if they are going to consider my wife’s income and her assets. Our home is in her name, as is the car and everything else we ever got. The only things I really own are the clothes on my back. My wife bought our home on her credit and job since I did not qualify for a loan. I have not worked since I went back to school in 2000 and I had to leave school in 2008 because of my disability. My loans are in excess of $200,000. Please help! Thank you.

    • http://yahoo.com Terri

      See a tax individual about ur 1099-C for Iam going to have to see one myself only I am not married but I do have a truck no house just a truck but still I want help with this or you can call the tax tiger they are tax attornies..1-866-233-8794 but only if you owe past 10 grand and I do..

  • LJ

    When my 2012 1099-c came, I was shocked to see the 50% increase due to capitalization of the interest while they made the decision that I was indeed disabled. They had already doubled because I had used all my forebearance and deferment time for the fifteen years I attempted to work while suffering from the illness which now has left me permanently and totally disabled. So I borrowed $71,000, which became $146,000 and now is $211,000.

    The tax burden will equal the amount originally owed. Well played, IRS and the rest of you, well played…

    • Leo Filon III

      “The tax burden will equal the amount originally owed. Well played, IRS and the rest of you, well played…”

      Close to that for me too. :|

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  • Mikey

    I don’t have a problem with the government trying to collect taxes on forgiven debt. There is such a thing as disability insurance. I have lived paycheck to paycheck for the last 15 years since graduating college. I still have 50K in student loans. But I also still make my disability insurance payments every month. It sucks that people become disabled at a young age, but we have all known people that have been affected by something like that. We can’t just assume it will happen to someone else. We have to take personal responsibility. I know some will have trouble obtaining a disability policy, so if anything we need to put resources into a way to get them coverage.

    • Leo Filon III

      It’s tough when doctors are in denial — take it as a personal, professional affront, I guess! — and won’t sign-off. And we’re not allowed to “doctor-shop” either, heaven forbid….

  • Megan

    I am sick! It is after midnight and I decided to work on my taxes and am just finding that I now have this new tax that I will have to repay. I had to fight to get social security when I first became ill. Then I had to fight to keep my home; a program that may end in a couple of years. I had to fight to have my loans discharged (completed the documents 6 times before it was approved). Now, another thing to deal with. I didn’t see this coming and I have another loan that is expected to discharge later this year. For those who insinuate we, who are in this mess because we are living beyond our means, I disagree. I am very careful with my finances. I worked a well paying job in IT and was laid off. I returned to school for a masters in divinity and social work to provide counceling and expected my income would more than meet my student loan debt as well as all other expenses. I went to school pt while I was working and didn’t need the loan. I had a lot of money saved to get me through, however 1/2 way through my first full time term, I became sick. I dropped to part time and a few weeks later my mother had a major stroke. I had to leave school to care for her 24/7 with very little family help. Paying for equipment needed for her, doctors and meds for the both of us, savings went quickly. Especially when we hit the Medicare “Doughnut hole”. Stress really exasperates my illness and caring for my mother in the midst of my own illness is enough. I’m not old enough to collect my pension so I’m stuck with ssd which is about 15 percent of what I used to earn. I’m in tears and literally depressed. Another monthly payment that from what I’ve read will never get paid off. There has to be something I can do but so far, my google searchs have proved fruitless. Anyone with ideas, let me know. I can’t let this take me down more. *tears*

    • WM

      Megan,

      Take a deep breath and don’t make yourself sicker. You know you didn’t make it this far by allowing yourself to fall apart over every bump in the road. OK, it’s a big bump, but there are many people to help. You file tax returns, so you appear to have some taxable income and therefore some assets. But you still may be in a position to take advantage of the IRS insolvency provision. As Gerri has indicated, check out IRS Publication 4681 and Form 982. They can be found (downloadable) on the IRS.gov website. This may be a situation when your loss of savings is a good thing! IRS insolvency is a simple concept, altho the IRS tends to complicate it a little. You are insolvent if your debts are larger than your personal assets (including your home and other non-business ownership). You just have to be very careful that you include everything you can within the term “debts.” It is based upon your situation IMMEDIATELY BEFORE your student loan was discharged, so you apparently can include your student loan as one of your debts. I’d be careful, though, about including your tax liability on your loan forgiveness (something that was mentioned above), as you would appear to have no such liability UNTIL you loan is forgiven, not before. This is definitely something you should discuss with a tax expert. As Gerri says, check with the Voluntary Income Tax Assistance Program. (Note: I am NOT an expert on anything anymore.)

      Thank you, Gerri. I am so grateful for your assistance. Yesterday, I received my 1099-C, and I was just as horrified as everyone else. If it weren’t for my disabled daughter “owning” a home which we will probably lose, we wouldn’t have a roof over our heads. I’m applying for a telephone line under federal assistance, and I’m supposed to pay taxes on $113,000? I think my original loans totalled $40,000. You set me on the right path, and as of today, I believe that I qualify for the insolvency exclusion which will at least solve this problem that I didn’t know I had. That’s if the program is as straightforward as it says. I’m checking with VITA tomorrow. Isn’t it great to be aging and poor?

      I worked as a Type A executive then returned to school full time at 40. Between my full time work as a legal assistant, school and raising my children, I guess my body gave out. I got sick, then sicker, then completely unable to attend classes in 1995. I was in pain all the time, had difficulty moving and could not sleep. In 1996, I dragged on through a year of part time work before I couldn’t do it any longer. I fought for SSDI for 3 years through the requisite 2 denials and a hearing, which receiving state disability (welfare) which treated me like a good-for-nothing. 8 years later I won my claims for workers compensation, but the bills I had accumulated took everything. In 2009 I filed bankrtupcy and I’m just starting over. I’m rebuilding my credit with the little funds I get from SSDI. I was so happy that my huge student loan debt would be removed from my record. You have a strong work ethic, you think you’ve done your part and you work yourself nearly to death, but there’s always something more. I hope this exclusion works.

      • Megan

        WM

        Thank you so much for you very caring and sensitive response. I’ve calmed down a bit and ready to try your recommendations. It was just such a shock to me. I was looking to use my tax return to pay off a couple of bills and to save for a vacation – obviously not the plan now. I really can’t complain too much when I read situations such as yours and others. Because I was only in school for a short time, the debt, while shocking, is not enormous and I can conquer it. I had a good cry, now it’s time for me to get working. Thanks again for your reply.

  • Sue

    Only 99,938 more signatures needed on the whitehouse.gov petition by Feb. 22.
    We will not get relief until the laws change. They won’t changeby us griping to each other on this blog.

    ALL of us need to contact our Sen. and Reps. with our issues. Contact them by phone and letters. Follow up. Lets find out which committee handles tax changes and contact the Chair and the other members. Write to the President! A story in a national newspaper or on a news show like “Today” wouldn’t hurt either. Anybody have any contacts for news coverage?

  • D

    We can argue til the cows come home over the question of whether paying taxes on a student loan that was fairly discharged according to the rules is a fair thing or not. But the IRS has made the ruling. It’s not likely to change soon.

    One of my big problems with the process is that there seems to be NO warning or education about this tax obligation until sick and dying people receive a 1099C a few months before it’s time to file the tax return.

    How hard would it be for the disability discharge application to include a WARNING or TIP that, if the discharge is granted, the lender will report the discharged debt to the IRS and the student may be faced with a tax burden. It’s fine to say “Ignorance is no excuse,” and I have now read on the IRS website that NOT getting a 1099C does NOT relieve the tax responsibility. But are we supposed to read the entire tax code to make sure we’re not missing anything? We can’t ask a question about something we had no idea existed.

    The Form 982 for insolvency asks for the date the debt was discharged. Well, is that the date the discharge was granted, the date at the end of the 3-year monitoring period, or the “date of event” on the 1099C? Which date do I choose? I need to know in order to figure out the insolvency question. In the instructions, the IRS does not clarify which date the student should use. The DOE says in its FAQ page that they will send the 1099C on the date the loan is discharged, NOT AT THE END OF THE 3-YEAR MONITORING PERIOD. They put that part in bolded letters. Well, the DOE did not send my 1099C until several months AFTER the end of my 3-year period. And the DOE is not the IRS. I don’t know if the IRS will force me to use the date on the form or not.

    If the IRS rules that I should have included the discharged debt amount at the beginning, that would mean I should have included it in my 2009 taxes, since 2009 is the date my application was approved and I was allowed to stop making payments. Would that mean that since I’m responsible for knowing something that never entered my head, I will now owe 3 years of penalties and interest on that discharged loan?

    I have absolutely no doubt that if I call the IRS 10 times and speak to 10 different customer reps, I will get different answers. I will be talking to people who do not know the answer, because those reps have not read the entire tax code, either. Who the hell has?

    • Gerri Detweiler

      I agree – that fundamental question (the date that triggers the 1099-c) – needs to be clarified and DOE needs to send out the 1099-c at the correct time if the earlier date is the one that applies. I’d suggest you next turn to the Taxpayer Advocate, and if they can’t help, hit up your Senators and Representatives for help. They have staff members whose jobs it is to help deal with problems constituents are experiencing with government agencies. Please do let us know if you learn anything.

      • Leo Filon III

        Don’t let anyone ever tell you being Disabled isn’t a fulltime job! To channel Yogi Berra, If I’d known being Disabled was gonna be so much work, I never would’ve done it! ;)

  • WM

    I came back to this blog to ask a question, but I can’t help sticking my nose in to give D a possible answer.

    D, I certainly have not read the Tax Code and probably never will. And I am absolutely no expert on this or any other area of taxes. However, the 1099-C is imprinted very clearly with the tax year/return for which it was issued, just like any other 1099 or W-2. If you received it recently, it should be showing 2012. HOWEVER, I believe you need to go back and reconstruct your assets and liabilities for the period immediately prior to your loan discharge, which is 3 years ago. I received my 1099-C for 2012 which was the year of my discharge, since I applied after 7/1/10. 1099-C’s are apparently being sent out the year of discharge for current apps, the 3 year monitoring to occur after, just like the announcement by DOE that you read. If you sent in your application before 7/1/2008 or between 7/1/2008 and 7/1/2010, your situation is treated differently in terms of timing, either because of changes in the law or IRS regulations. I believe your 1099-C is sent either 3 years after the date of disability or 3 years after your physician signed the application, respectively, the ending dates of your 3-year monitoring period. At least that’s what I got from one of the sources Gerri sent us to, or was it IRS? At least the current method doesn’t force us to attempt to reconstruct records of 3 years ago, which you appear to face.

    You obviously want to hear from Gerri and/or consult some tax expert to receive a more knowledgeable answer. Unfortunately I cannot find a contact number for any of the free services (only a number for find a local site); I guess you have to show up at their door and wait in the line with filers in order to ask a question. If the IRS helpline and VITA, TCE, AARP or another free service can’t answer the question, maybe the IRS advocacy can. IRS describes it as a problem solver, but then goes on to hint it may be able to answer difficult questions. http://www.irs.gov/advocate or 877-777-4778. All kinds of contact INFO is available at the beginning of most IRS publications under How To Get Tax Help and their Pub 910 Free Tax Help, but actual contact itself appears to be a problem. I’m disabled, like you all, and I can’t drive all over town for answers like I did when I was a kid.

    Actually, my problems lie with the “reducing tax attributes” (Part II) portion of 982. (Do taxes have any attributes?) My personal assets are so limited, it makes no sense to even fiddle with them and their reduction of cost bases. Especially since the reduction will put their value at so far below zero (because of my large loan forgiveness) it’s ludicrous. Is it meant to be required for persons for limited assets or only personal assets? Instructions don’t say. I called IRS and was immediately transferred to the (get this) “Complex Individual Issues Department.” Apparently the regular IRS reps don’t know anything about 982. (Why should we?!) Anyway, I waited 2-1/4 hour on hold and finally gave up. I’ll try again in the early a.m.

    D, I agree with you completely. There should be a warning about possible tax consequences BEFORE we file for disability discharge. I recently learned (from AARP) about the different ages at which you can file to activate Social Security (pension) along with the widely differing consequences. But would the SSA broadcast before you apply about how much more you can receive if you wait until age 70? Start at an age earlier than 62 for SSDI and boy, do we lose out. So, why should the IRS give up a whole bunch of prospective new tax sources just for the sake of “truth in taxing”?

    Anyway, my question is this, and it may be off topic (again: If outright awards for education ~ scholarships, grants, etc. ~ are tax free, why do we owe taxes on a forgiven loan that has, essentially, become a grant? Just because we originally thought we had to pay it back? After all, I never had tax credits and deductions for putting myself thru school like they do today. That was limited and just for dependents when I went back in 1985. I suppose this becomes just another rhetorical question about the IRS.

    I signed the petition and so did my daughter. She posted it on her Facebook page. And she has quite a following. So maybe that will help. Visit the petition website and SIGN, SIGN, SIGN.

    My best to everyone here. And especially another thank you to Gerri!

  • WM

    You can’t tell when you’re writing in this blog exactly how much you’ve written and how long your comment actually appears. I apologize for my verbosity (better than “big mouth”). This is Gerri’s page. I’ll try to shut up from now on.

    • Gerri Detweiler

      Actually I was just going to thank you for weighing in and sharing your experience and what you’ve learned wading through these forms. As far as your question, I don’t believe Part II applies if you are just trying to calculate the insolvency exclusion for personal debts. My understanding is that all comes into play when you are dealing with business or farm debts. Do let us know how this turns out for you!

      • WM

        Gerri,

        I’m grateful that you think I’ve been helping here. I feel like I’m working so hard over something a tax expert could easily clarify. I’ve actually figured out how to calculate this stupid Part II! I’ve got an appointment with AARP/Taxaide on Saturday, so I’ll let you know what transpires. I hope they have information on these obscure forms.

        I have discovered that there really is no way to contact VITA/TCE/AARP. The telephone numbers available are only for locating sites where they have set up shop for the tax season, apparently in libraries and community centers. But they are certainly more prevalent than IRS offices. Perhaps right in your neighborhood. I found 5 sites within 5 miles of me, and I live in an outlying suburb. I tried contacting IRS by phone a second time, and after 30+ minutes on hold I gave up for good.

        Also, if you call for an appointment with the freebie preparers and find one site is busy for weeks, don’t give up. Try another. Our local library was full until mid-March. Our community center gave me an appointment in 2 days. If you qualify by income or age, you just need to make an income less than $51K.

        Thanks again, Gerri.

  • Pingback: What is a 1099-C? Your Top 11 Questions Answered | Credit.com News + Advice

  • sherry W.

    I am disabiled too. I walk with a walker because a fall could result in a broken hip. I had my studendent loans “discharged”!!! Nobody told me it would be considered INCOME!! My husband works in retail and my SS check barely covers the rent portion of our bills. We cannot afford a house so appartment rental is the only option. We have grow daughters( one had her own stundeny loans anther other works in retail). I cannot get SSI because the say”we” make “too” much money, cannot get “government” assistance for same reason. We have never had to pay taces, until NOW!!!! The discharge cause us to owe over $4,000! We don’t have it! Why didn’t they tell us?

    • Gerri Detweiler

      Sherry –

      Given what you are saying about your financial situation, it sounds like you may qualify for the insolvency exclusion. Have you looked at that yet? U explain it further in this piece: 1099-C In the Mail? How to Avoid Taxes on Cancelled Debt. Start there and let us know what happens.

  • D

    Gerri, thank you for your reply; and Wm, thank you as well. I appreciate it.

    OK, I’ve done a bit more research about the 1099C. What I found were the instructions and how and when to file the form FOR THE LENDER. That is, these instructions tell the lender (in a student’s case, the DOE) what the rules are and how to file the 1099C. The rules appear to give the lender a fair bit of leeway in choosing things like dates. The instructions define the following: “IDENTIFIABLE EVENT,” “THE CODES ASSOCIATED WITH THEM,” “WHEN IS A DEBT CANCELED.” It can help explain how the lender is choosing to fill out the 1099C that they send to the IRS and the taxpayer. I tried to copy and paste, but for some things, it wouldn’t let me. The following 7 lines is a copy and paste.

    Form 1099-C, Cancellation of Debt

    File Form 1099-C, Cancellation of Debt, for each debtor for whom you canceled $600 or more of a debt owed to you if:

    You are an applicable financial entity (see Who Must File in the instructions) and
    An identifiable event has occurred.

    If you cancel a debt before an identifiable event occurs, you may choose to file this form for the year of cancellation.

    OK, back to me again. The first question you want answered is “What is an identifiable event?” I’m including a link to the page where all the instructions are; it’s a PDF document. At the bottom of Page 3, under the heading “When Is a Debt Canceled?” there are 9 types of “identifiable events” described. Each one has a code, but the lender is not required to list the applicable code this year. None of the 9 identifiable events specifically addresses student loans, but in my “unlegal” opinion, #6 most closely applies.

    http://www.irs.gov/pub/irs-pdf/i1099ac.pdf

    On page 2, near the bottom, you will see this (in regards to when a lender should file a 1099C:)
    2. An identifiable event has occurred. It does not matter whether the actual cancellation is on or before the date of the identifiable event. See “When a debt is canceled, later.”

    Also, on the bottom of page 3, it says “A Debt is deemed canceled on the date an identifiable event occurs.”

    So, those two statements seem to contradict each other. Apparently the actual cancellation is not the same as the identifiable event, but then at the same time the debt is deemed cancelled when the identifiable event occurs.

  • WM

    Gerri and All,

    OK. So I went to the AARP/Taxaide preparation assistance site yesterday and just asked questions. The tax preparer I spoke with is a volunteer, but she says she has been doing this on and off for decades. The main things I wanted to know were the following. I hope this helps.

    1) Why have 1099-C’s been sent out on different schedules for those who have received their student loan cancellation in the last several years?

    ANSWER: There appear to have been 3 different regulations in operation depending on when the application for cancellation was received by the lender, before July 2008, between July 2008 and July 2010, and after July 2010. It looks like now the 1099-C will be send out for the tax year in which the cancellation occurred. (I admit, I did show her the info I discovered for this answer and she interpreted it the way I had.)

    2) With the different regulations for timely sending the 1099-C, what date is used to compute the insolvency?

    ANSWER: “Immediately before” the date the loan was cancelled. That date should be the one on the 1099-C labeled “Date of identifiable event.” As far as my situation goes, the date on my 1099-C is the same as the date Nelnet reports in the notice of loan cancellation I received from them.

    3) Do I have to complete Part II of Form 982 if I have received a 1099-C for student loan cancellation, I’m using the insolvency exclusion, I’m on SS and I have no business, farm or home asset or debt? Only personal property assets like those listed: books, jewelry, car, art, furniture, etc.

    ANSWER: YES. The IRS wants the taxpayer to reduce the cost basis of each asset used in computing the insolvency exclusion so that when she sells it, the gain will be that much higher, and the taxes will be, too. In other words, when you file a tax return to report you sold your car or book or necklace or chair. Sure. ;-) They really are after the taxpayer with a larger item to sell: securities, home, etc., but even if you only owe $1 in taxes, they want it and they want it reported. So everyone gets to complete Part II. And everyone is supposed to file a return for any later gain in the sale of property. This is IRS’/the government’s way of having each taxpayer eventually pay a little back for the priviledge of benefitting from Form 982′s exceptions and exclusions.

    So, now you get to figure out how to calculate Part II, even with your brain muddled from pain and illness. IRS doesn’t exactly explain how to do it, but they do give examples, I think in the form instructions. I would suggest anyone with large assets to contact a tax expert, as an improper calculation could make a HUGE difference to you later on. (You probably don’t do your own taxes, anyway.)

    4) If I do my Form 982 calculations and determine my assets are less than my debts even without adding in the student loan (leaving me with the entire loan excluded and no income at all to report), must I complete a 1040?

    ANSWER: YES
    The tax preparer believes that Form 982 cannot be filed on its own, much like a schedule cannot. It is meant to be an attachment to a 1040 (not a 1040EZ). So you may end up filling out your return showing -0- on Lines 21, 22, 37 and so on. Well, happy day!

    Oh, speaking of 1040′s, my library says it has not yet received the latest version of 1040, its instructions, etc. due to the late changes in IRS regulations. They even warned that the IRS.gov website doesn’t have them. So it’s possible that the printouts I made from the website are not up to date. Beware.

    Caveat: As I said, this tax preparer, while familiar with Form 982 and its instructions, is NOT a 1099-C expert. If you have questions that still need answering after reading the forms and instructions, speak to someone who is.

    Oh, one more thing. I complained about my experience trying to speak to an IRS representative over the phone. My preparer said “Don’t even bother; it’s impossible!”

    Good luck, everyone, and Happy Returning!

    • Gerri Detweiler

      Thanks for all this great info! You’ve done a great job finding answers despite everything you’re going through. I am sure other readers will appreciate it.

    • Denise

      My loans were discharged this year and I am preparing now for filling out my taxes. According to the insolvency worksheet I am insolvent more than the loan amount that was forgiven so I know I will check 1b on the 982 form. I do not have a business or any capital losses just a home and an auto. Not sure of what I should include on line 10, can anyone help????

      • http://www.credit.com/ Credit.com Credit Experts

        Hi Denise — Have you tried contacting the IRS directly? Hold times may be lengthy but it’s worth the wait to make sure you’re getting accurate answers to your questions (especially if you’re trying to complete the form without the help of an experienced tax professional.)

        We’ve had several consumers come back and share their answers to help others that may have the same questions/problems.

        From the IRS Form 982 website page:

        “If you have a tax-related question, please go to Help With Tax Questions or call our toll-free number at 1-800-829-1040 (Individuals) or 1-800-829-4933 (Business). ”

        For more detailed information on how to handle 1099-C tax forms, Gerri has written extensively on the subject here.

    • G Augusto

      WM: Thank you for sharing all this information. The forum here is all about disability; and most IRS advisers go by the information germane to forms the agency generates. Of course, as some CPAs and Tax Preparers who have participated in this thread point out, one can always look into the Insolvency category to reduce or even “erase” tax liabilities connected with our student loans being discharged. The problem is that, when one calls in, IRS representatives might be able to help people with questions already addressed by the examples they cite in the forms; but will most probably not be able to answer questions about student loans; or–more specifically– loans discharged due to permanent disability. It appears that–in spite of lifetimes of service and sacrifice–we sort-of disappear from the radar screen as soon as we are labeled as unproductive members of society :-(

    • http://www.Credit.com/ Gerri Detweiler

      This is extremely helpful, and very clearly written. Thank you so much!

  • D

    Thanks, Wm, for the update. I appear to fall into the middle category rules, since my application was approved in Jan 09. So I have no idea what those rules exactly were. NelNet (the loan servicer for the DOE in disability discharge cases) put a date of 15 June 2012 on my 1099-C, but I really don’t know if that date is the correct one. That is, NelNet could have made a mistake. My daughter works for a student loan servicing company (Not NelNet), and believe me, she tells me paperwork errors are not uncommon. I need to figure out what the rules governing my particular situation are/were, and see if the date is correct.

    Then, to compute the value of my assets on a specific day in the PAST is something I have no idea how to do correctly. Generally when one is trying to figure out what something is worth, it’s a current thing.

    And I do own a house, but that’s my big thing. I mean, I’m not rich and I do my own taxes. I don’t have investments or bonds or any other real property, just my personal property. My house is pretty much furnished from thrift stores. And it was heavily damaged during a hail storm (my area had a federal disaster declaration), so how much do I take off the value for that? Or do I take off anything?

    Will the IRS send someone out to my house to make an appraisal (and charge me for the privilege?) Will they go through my house and inventory my belongings to see if I have valued everything correctly? How much is my dog from the shelter worth? The dishes in the cupboard? The dust bunnies under the 10-year-old couch? My collection of family photos? How will the IRS know what my stuff was worth on that one day in the past? Do they have a representative who time travels? I wouldn’t be surprised to find out they do.

    I don’t know if I mentioned this earlier (memory issues from the brain tumor and the meds), but I read about a young man who was going to school. Part of his funding came from a ParentPlus loan (his parents had co-signed the loan). I think he was in the Guard or was a Reservist or something; at any rate, he got called up and went to Afghanistan, where he was killed in the service of his country. The bank forgave the loan. The IRS then sent the parents a tax bill for $28,000.00. They contacted their lawmakers, who successfully lobbied for the law to be changed in such situations. So they didn’t have to give the government their money. Just their son.

    So, I write much of this with tongue in cheek, because even after 5 bone marrow biopsies and rounds of chemotherapy and spinal taps and hospital stints and infections and several “oscopies” and two brain surgeries — hell’s bells, I am so lucky. My most precious asset is safely asleep upstairs.

  • Amy

    thanks for all this valuable info …I received a 1099c also….but my cancellation figure is low so I think I will come out of it far better ….owing less then some of these stories …Good luck to all!!!!
    Amy

  • D

    Hey, just a note to bring up a point. Generally Social Security is considered non-taxable. However, if you have taxable income, then part or all of those SS benefits will likely be subject to taxation as well.

    When you fill out your 1040, you list your SS benefits (including what you pay for your Medicare premium), on line 20a. Then you put how much of that is taxable on line 20b. The 1040 instruction book (online as well) has a worksheet you fill out to determine how much of your SS benefits will be considered taxable income.

    For those of you getting 1099C’s with enormous amounts such as 150,000, I believe you can expect to find that your entire SS benefit (including what you have paid, if any, for your Medicare premium, will be subject to federal tax. Not only that, but I expect the tax bracket in those cases would be quite high. The inclusion of the discharged student debt, especially when it’s a large amount, is triggering a domino effect. The higher the student loan amount, the more of your SS check is taxed and the higher the rate is.

    Then, if you can’t pay it all by the tax date, and have to go on a payment plan with the IRS, they will add penalties and interest to what you owe.

    It appears the insolvency exclusion is about the only hope many people have to avoid triggering this avalanche.

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  • Holly

    The White House petition site is little more than a publicity stunt IMHO. We need to get Congress on track, which likely means multiple letters, phone calls etc. Even then, with politics being what they are, who’s to say. At any rate, here’s some contact information:

    Senate Finance Committee
    http://finance.senate.gov
    Phone (202-224-4515)
    FAX (202-228-0554)

    The Honorable Max Baucus Chairman
    Committee on Finance
    United States Senate
    219 Dirksen Office Building
    Washington, D.C. 20510

    The Honorable Orrin G. Hatch
    Ranking Member Committee on Finance
    United States Senate
    219 Dirksen Senate Office Building
    Washington, D.C. 20510

    ***
    House Committee on Ways and Means
    http://waysandmeans.house.gov/
    1102 Longworth House Office Building
    Washington, D.C. 20515
    Phone (202) 225-3625
    Fax (202) 225-2610

    ***
    Joint Committee on Taxation, Congress of the United States
    https://www.jct.gov
    The Joint Committee on Taxation
    1625 Longworth House Office Building
    Washington, DC. 20515
    Front Office: (202) 225‑3621

    • Gerri Detweiler

      Holly – Very helpful! I would add Elizabeth Warren to that list, even if you don’t live in Massachusetts. She seems to have a great deal of compassion and understanding for what consumers are up against.

      Washington Office
      Russell Senate Office Building
      2 Russell Courtyard
      Washington, DC 20510
      Phone: (202) 224-4543
      http://www.warren.senate.gov/

  • Richard B

    If you cannot prove insolvency on stated amount you will end up paying income tax on cancelled loan amount and a percentage of SSD My case 85% of social security became taxable. I have been hit with over $4100.00 to IRS and $1700.00 to the state for cancelled student loan as of May 2012. I have been on disability since may of 2010. The problem is when you qualify for Social security disability you are basically a pauper right from the start, with the social security guidelines otherwise you cannot really qualify for disability. You filed for cancellation due to disability because you cannot work or pay off the loan. How does the government expect you to pay these large tax bills when you couldn’t pay the minimum monthly payment. What is wrong with our system. How can all the disabled people ban together and get the government to pay attention as to the problems they are creating the disabled American people, believe me if I could work, I would. Living on $1000.00 a month is hard enough along with the physical problems one has then get hit like this. The government passed laws to protect the disabled in the workplace and such , but then throw us to the wolfs to fend for our self’s or die when it come to paying off tax bills. This is not right.

  • Karen

    Forever grantful for the discharge of student loan due to the death of our son. I received a 1099-C, and all we can find is that it is taxable. Is there anyone else out there that has been down this road and may have found a different outcome?

    • D

      Karen,

      I’m so sorry to hear of the loss of your son.

      Were the loans his alone? If so, his estate would be charged any tax due on the 1099-C amount. If he had no assets as of his passing, then the issue is moot.

      If you are responsible in any way for the loans (say, you co-signed or took out a parent-plus loan), then the loan is still your responsibility. The only relief here might be if your son was in the military. I did read about a law that was supposedly passed to assist parents in a case like this. Your congressional representatives should know, and they will help you if you contact them.

    • http://yahoo.com Terri

      Hi Karen If I was you I would talk to a tax attorney and see what he tells ya for I am headed in that direction myself. I wouldn’t want you all to loose ur home or car over this and IRS don’t care about what happens to us they like their jobs and they do them well.I had gotten hurt in 01 was in College was on assistance from the state for medical and it was reported because I had to repay it all back.I wish I had known more about this discharge stuff for I may have gone another direction then maybe it wouldn’t have been so high for me to repay it. Now to me 65,661.51 is high enough when I don’t have the funds to pay it, being on a disability is hard too and I hate it.. I wonder if I can file chapter 7 on this going to look at all options this Friday.. Hope this helps ya..

  • http://yahoo.com Terri

    HI Gerri I was wanting to know how can you file taxes when u haven’t worked since 01? I mean I have been found disabiled by social secuirty laws since 06 even though I had filed with them in 05 due from a work related injury and I was in college at the time I had gotten hurt and then I had filed for a permanent totally disabile from my student loans which took place about the same time and they just now dicharged them then I get a 1099-c that I have to pay taxes on 65,661.51 cents. I mean I don’t have anything and I had filed BK in 05 on medical bills big time bad ones..I was on AND in 01 and it was reported to Uncle Sam was in a wheel chair for almost 2 yrs, almost dropped out of school but the health counselors changed my mind and I got my BA in Criminal Justice wanted to work at our local prison here but they won’t hire me due to my med’s and blood clots that I get.. I am on SSI now I get paid about 473.00 I don’t own a house, all I have is my old computer, Tv and a few books and a truck that is old nothing else.. I wouldn’t mind paying it if they didn’t eat me alive and if they would take payments I am going to see a tax indivdual on Friday I am scared to death nothing can be done. Ang suggestions? Do I need to see a tax attorney to.. I had all my student loans put in one place then when I wanted to file for discharge they company gave me a run around ACS they fought with me for about 4 yrs then I got tired of it and went right to the Board of education and they placed me on something for another 3 yrs then they told me I was discharged 4-12 didn’t think much about it until now..All of this could have been advoided if ACS hadn’t jerked me around and I had enough DR’s signatures saying the same thing..Then the laws change on loans and taxes..

  • http://yahoo.com Terri

    Hi Gerri I would like for u to email me with an answer or at least ease my mind. I wish I had known about this mess sooner I think IRS likes to shock all of us with this Tax thing and since Obama has been in office he doesn’t help much by changing things since our land of the free is in deep debt he wants all of us to pay our share,like I would love to but I am unable to have the job of my dreams and the Dr’s won’t let me work because of my leg its bigger than the other one and very painful at times, so I use pain med’s for that when I have to. I still get depressed for I just hate that I didn’t see the snowball that hit me once and now twice, can u file chapter 7 on something like this I wonder,65,661.51 is alot of money to me Iknow most folks on here have way more than I do and I feel for them, when our gas prices are high food is high and Obama wants the middle class to do better then he should help us disabled folks too, not just give us a number or push us aside like we mean nothing..

  • Brenda

    I filed my taxes today after a student loan discharge in 2012 and wanted to write about the process in case it helps someone else. You may not have to pay some or all of the income tax on discharged student loans, depending on your situation.

    I applied for a total and permantent disability discharge of my student loans in 2009 via Nelnet’s disabilitydischarge.com website. The process was a little different prior to 2010 and after turning in the paperwork from my doctor, I was granted a Conditional Discharge for 3 years. In May of 2012, after sending a letter to Nelnet at the end of each of the 3 years, stating that I had no income other than Social Security disability, (you can earn some small income each year..I forget the amount, and still be eligible for disability discharge) my loans were permanently discharged. In January of 2013, at the end of the 3 year period, I received my form 1099-C from Nelnet. Luckily, I was aware I would be getting the form and that the loans, including interest, would be considered income for 2012, or I would have completely freaked out.

    I had read about the insolvency exclusion via the web, and knew that I would receive the 1099-C, and that I should file IRS form 1040, and a form 982 (after completeing an insolvenct worksheet from the IRS site). On line 21 of the 1040, I would not write in the student loan total as income, but leave it blank and submit form 982 “Reduction of Tax Attributes Due to Discharge of Indebtedness” with my 1040. I checked box 1b on the 982. Also on the 982 in Part 1, item 2, wrote the full amont of the discharge, including interest from the 1099-C and that was all I filled in on the 982. I wrote the full amount of the discharge on line 2 of the 982 because, after filling out the insolvency worksheet, the IRS instructions said to write the smaller number, either the full amount of the discharge, or the amount of the insolvency from the worksheet. My insolvency number was greater than the total of the discharge, so I used the discharge amount on the form. The “Insolvency Worksheet” form asks for a list of liabilities on the day before the final discharge and a list of assets on the day before the final discharge to determine the amount of insolvency. Since my insolvency number was greater than the loan discharge amount, I don’t expect to have to pay tax on the student loan discharge. I wish that was true for everyone in this situation.

    Today I met with a certified IRS volunteer for help with the forms. He was not familiar with a student loan discharge, but did help me muddle through the filling out of the forms. The large amount of my loans (originally less than 50K, but with interest, penalties and fees, now over 149K), made him not want to e-file my return under his name, or sign my 1040 as the preparer. He did instruct me to sign the 1040, put a copy of the 1099-C , a copy of the 982 form, the insolvency worksheet and a copy of my 2012 Social Security Income statement into an envelope and mail my packet to the IRS. Fingers crossed that i’ve done it all right. I would have much preferred a professional preparer complete the forms and co-sign with me, but am not in a position to pay for the service, and the volunteer today was enough help that I feel fairly confident that I’ve filled the forms out properly.

    If you meet with a preparer who tries to tell you that the amount on the1099-C must be counted as income, is not familiar with the 982 and insolvency reduction, don’t give up until you find someone who does know.i’d be interested to hear others experiences with their taxes also. Student Loan Justice on the web and on Facebook is an organization working to restore bankruptcy and other protections to student loan borrowers. Best of luck.

    • Gerri Detweiler

      Brenda – Thanks so much for sharing all of this! Extremely helpful.

    • Gordon

      How did this work out for you? I am just looking into this… Thank you for the info.

    • Ann

      Yes; how did this work out for you? Brenda, did you include the amount of student loan debt as a liability on worksheet for 982 as prior to? Or were you insolvent by other liabilities?

  • J

    Hello Gerri,
    Have you ever heard from anyone who actually paid federal income tax on a student loan discharged because of disability? I have read numerous comments on the internet from people complaining about tax they think they may have to pay, but I don’t recall anyone stating that they actually paid it. Surely, not everyone has an exception or exclusion listed in IRS Publication 4681. Am I missing something?

    • Gerri Detweiler

      You’re right – not everyone will qualify for an exclusion or exception, especially if they have significant assets (such as retirement accounts) or if their spouse has significant income or assets at the time the debt is cancelled.

  • Pat

    Boy am I glad I found your site! I was going to initiate the discharge for permanent disability on whatever is remaining on my husband’s loans and after seeing these horror stories am rethinking that route. He fought with the DE for several years over his loans, he worked his required years in low income schools for repayment and also had military service, which was a countable exclusion towards forgiveness. Payments had been made even though we didn’t feel they were warranted due to the teaching and military exclusions fulfilling the then requirements. I don’t think DE ever communicated with these servicers and I don’t know that we even legally owed money. We kept getting phone calls from what we think may have been servicers, don’t know never identified themselves. Have seen enough posts to know that this was part of their operation standard. Tried to identify the callers, was usually not successful. They would call and hang up, never leaving messages. Since the numbers changed so often, it is only a guess that that was who was calling, might have been legitimate telemarketers. We have an answering machine, it wouldn’t have been hard to say who and why they were calling if it was that important. We haven’t heard from them for a few years, all went silent.
    Anyway, my husband is 100% disabled since 1996 injured in 1992 and 30% VA disabled since 1972 and 70 years old. We don’t pay taxes, we don’t make enough, and claim our disabled son who lives with us. This past tax year we didn’t get our tax refund, (the EI) the IRS site said it was taken for debt owed. They said on the site we would be getting a letter. It was very cryptic. Sure! No explanation, ever yet. Don’t know what is owed. I guess I’m supposed to be clairvoyant and know what the government is doing. No one has explained this. I assume it is still the DE that can’t seem to get it’s right and left hand working together. I see that the latest rules and operating standard puts it all in DE with no middleman. Hope that works better than our experiences with DE we started back in 1996. I’ll have to have my husband find all that correspondence he sent to DE and go over it myself and hope there are some answers, as he’s early onset alz and forgetful. We have to toe the line, but they don’t, they forget their paychecks come from the taxpayers.

    • Gerri Detweiler

      Pat – I don’t want this article to discourage your husband from applying for the discharge. It may be the best option for him. But what I would encourage you to do is to talk with a tax professional before you do so, or at least try to fill out the insolvency worksheet in IRS Publication 4681. If you are insolvent by IRS standards to a greater extent than the amount you are trying to get discharged you may be fine and may be able to avoid paying taxes on the cancelled debt. It certainly sounds like that could be a possibility.

    • Gerri Detweiler

      Pat – I am glad you found it helpful. But I also don’t want to discourage you from trying to get the loan discharged if that’s the best option for you. You may not wind up paying taxes on the cancelled debt if you qualify for the insolvency exclusion. I suggest you read Publication 4681 and fill out the insolvency worksheet. If you qualify, that may still be a good option for you and your husband.

      As for your horror stories with the loans, I encourage you to at least file a complaint with the Consumer Financial Protection Bureau.

  • L

    I live in Pennsylvania where a student loan discharged because of disability is not taxable at the state level. In Pennsylvania, I believe that all marital property is owned jointly. Therefore, my wife is insolvent and I am insolvent because all of our assets are owned jointly. Joint ownership is an entity different than my wife or me separately. Jointly we are not insolvent, but each of us separately is insolvent. Can I claim insolvency this way to get out of paying federal tax on my student loan discharged because of disability?

    • Gerri Detweiler

      You can claim the insolvency exclusion if you qualify. But it sounds like you aren’t sure whether you qualify if you file jointly. This is a confusing topic. I interviewed a tax professional about this issue and wrote about it here: Form 982: The Way to Battle a 1099-C. If you are still not sure after reading his advice I’d suggest you talk with a tax pro who has experience with these forms.

    • Gerri Detweiler

      I tackled the topic of spouses and the insolvency worksheet in this article: Form 982: The Way to Battle a 1099-C. I hope you find it helpful.

    • Gerri Detweiler

      We published a piece about spouse’s incomes and 1099-Cs. You’ll find it here: http://blog.credit.com/2013/02/irs-form-982-raises-questions-for-taxpayers-with-1099-cs/ I didn’t get a definitive answer when researching it, but I hope you’ll find what I learned helpful.

  • http://credit.com Lisa

    My goodness, there seems to be a double-edged sword of opinions out there on the subject that indeed a personal can and does become legitiably so physically and I do mean chronically, seriously ill or mentally ill that they are no longer to function as the lucky, others are able to do throughout their life time. I’m so happy for healthy, happy people who are able to pursue their academic dreams and make them a reality but my dream went south. I fought hard to earn my bachelors’s degree with honors and went on with the same mental strength that got me through those last 8 years – yes I could only make it part-time but I persistently put one foot in front of the other until that awesome day, my college advisors told me that this was it! I was qualified to walk across their beautiful historical, architectural surroundings to finally hold my long sought-after diploma. I was over the moon with pride and happiness! Drove on despite chronic pain, feelings of flu constantly, osteoarthritis in all joints, neurological problems with numbness and pain and by God, I also earned a masters’ in Clinical Social Work and tried my best to work as a medical social worker ( in a hospital setting) for nearly 3 + years on a (as needed basis) but they needed me every day practically. I found that I had chosen wisely in my studies for I naturally was good at my work, no really. It came naturally to me – my education was a super bonus that helped me to help others at their lowest point. I worked soooo hard but finally after three years, my body collapsed and I became more ill. I began having TIA’s and sometimes a stroke. I’ve survived all praise God. I had to fight first Direct Loans, then Sallie Mae, and then NelNet in trying to discharge my loans. It took almost 10 years to do this and my payment went from low 80′s to $97, 770. Unbelievable. Whomever allowed interest to accrue on those consoludated loans while they were in dispute should be fired! My loans were finally discharged since i’ve still been having mini strokes or worse. Discharged in 5/2012 and didn’t take them but 8 months to get us the 1099-C form, I believe it is. I called H&R Block right away – the tax preparer I was referred to said it was indeed complex and bring me everything I had in means of financial information. Thank goodness I had my husband beside me, I have my Doctor to back me. I’m also lucky I’m a massive donation nut every year….love to give away whatever we’re not in need of, clothes from all family members, lots of medical bills and we’re underwater with our mortgage. In this country it’s not enough to be terminally sick for the rest of your life, it just about “the money”!!!

    • reiscr

      I know exactly how you feel!! It took me 17 years to get my BBA in Business and managed to get through school through many surgeries and illness; now I have debilitating neck pain as well as low back pain. Worked in a sick building as well, resulting in severe Asthma; but I fought on and earned my degree!! And yes, I obtained my credit report, doctor bills, etc. and was found to be insolvent. I’m a professional tax preparer, so I knew exactly what I needed to put on that Insolvency worksheet!!

      • G Augusto

        The thing is that, not many of us know how to fill that pesky insolvency worksheet…
        According to what I read, one is supposed to list the outstanding student loan that was technically outstanding before the discharge…
        If I do that, I am totally insolvent; but if I do not, I am still liable for a huge chunk of change…

        • http://www.Credit.com/ Gerri Detweiler

          Be sure to include the debt that was outstanding before the discharge.The IRS says: You can use the Insolvency Worksheet, found later in this publication, to help calculate the extent that you were insolvent immediately before the cancellation. (I added the bold for emphasis.)

          And believe me, I agree it’s not easy at all for many people to navigate this!

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  • Deborah G.

    I just filed my taxes and found that due to a Student Loan Forgiveness that I owe $49,000 in Federal taxes and $8,900 in State taxes. I mailed my return without payment, because I too am permanently disabled due to cancer. Does the insolvency exclusion and form 982 have to be submitted with my tax return? I do not own any assets, but I do have a 2001 automobile. So when I complete the insolvency worksheet, it is advised to include the debt amount on the 1099, is that a correct interpretation? I have been reading the post here and they all have been very, very helpful. Thank God for people that are willing to share their experiences and knowledge. God bless you all and pray for those persons that are negative and critical of our situations, because if we all live long enough something will try and test you. I pray they can get back up and keep going like I pray ALL of have.

    • Brenda

      Hi Deborah..something does not seem right with your taxes. If you own no property, except a 2001 automobile, it doesn’t seem like you could owe all that in federal and state taxes due to insolvency. I don’t know if you filed a federal form 1040, but if so, you don’t write in the amount of the discharge on line 21 as income. Also, you count the amount of the student loans as a liability of the insolvency worksheet. I was instructed to mail in the 982 and the insolvency worksheet with my taxes, as well as proof of my ssdi income. I’d encourage you to meet with someone for help. Don’t give up. Best of luck.

  • http://PamelaRp@facebook.com Pamela Pugh

    In 2012 on June 30 2012 Sally Maye sent me a 1099C for a Student Loan that was discharged and the loan is from 1981-1986 when I graduated. The loan is 27 years old. The rest of the loan amount was 16640.77. Today I went to the local H and R block and spent $300.00 which is high to have my taxes prepared because I had called the IRS and was on hold for a long long time (hours) and got no one to help me. I was in a horrible car crash one in 1991 and another one in 2006 blowing out my knees and making me permanantly and completely and totally disabled with anxiety and depresssion and bipolar disorder as well as arthritis.I do not drive but was in other peoples car. Not only can I not drive but I have never been able to write at all. I am very very ill and it is not my falt I am this way. I have a 4 year degree in Accounting fron NSU in Oklahoma in 1986. I used to be a Bookkeeper Accountant in Mass between 1988 and 1991 and lost my job due to outsourcing in the spring of 1991 and had to move 5000 miles to Portland to find a job and the unmemployment rate was low here. I fought my disability case for 12 and a half years and won in Feb of 2012. I lost my job in 2009 working for a call center and because the minimum wage is too high in Oregon MSI went through a loophole and got workers in Arkansas for $6.20 an hour. If a firm can prove that they have a certain number of low level workers and make less than $500,000 in sales then the company can pay the state mimimum wage in that state if it is much lower than the federal and that is exactly what they did. They promised us the moon and job help and we got nothing once everything was said and done. Call center workers are leaving the state and going elswhere and never ever returning. I went to work from February of 2011 to August of 2012 at HBW leads as a call center worker and was let go after 11 months of hard work. Now H and R block is saying I have to pay the state of Oregon $1200.00 and the IRS around $4000. This is a huge problem in the US and according to internet research I have done. There are no entry level jobs here and all are being sent away due to no falt of our own. My unemployment ran out and the unemployment office did nothing to help me or the other 199 other workers that were let go. Most lost their apartments and had to move out of Portland and my brother had to do the same because he was working at MSI for a couple of days a week part time and they would not help him get work and he left in September of 2012. I need help please. I do not have this kind of money. I m poor poor poor and have nothing. Noreen the H and R block lady said that a lady with 2 cars and a house and many other assets they declared insolvent yet with my NO ASSETS and No Anything and no car or anything they said I was NOT insolvent and rich. Rich is not getting only $950.00 total per month for SS and $100.00 being taken out for Medicare. I think it is horrible that our government is taxing us twice on these loans technically if you look at it. They have sent out almost 7 million of these 1099cs this year already and I know that all 7 million do not have any money to pay this kind of student loan debt we are having to pay for again when we thought it was written off and discharged. I am broke and do not have this kind of money to pay for a loan I could not pay for to begin with. I am sick and still am sick and will never be able to work again. Could you please call or email me with some answers as what I can do-Pamela Rachelle Pugh.

    • Terry

      Pamela: Sounds like you need someone other then H&R Block to look at your taxes. If your situation is as stated and you have no assets, your loan cancellation amount should almost exclude itself from income. Don’t trust H&R block with form 982, it’s so confusing that I doubt the IRS even understands it. The fact is that the woman with 2 cars, a house and other assets could technically be insolvent at the time of the loan cancellation based on form 982.

    • Gerri Detweiler

      I am not a tax professional so I can’t ascertain whether the advice you’ve received is correct or not – though Terry does make a good point that these forms are complicated, even for tax professionals. I’d suggest you next try to get help from the Taxpayer Advocate. You can get the form you need here. I would also really encourage you to let your elected officials in Washington know what a hardship this has created for you. If the Taxpayer Advocate can’t help you, you may want to get a second opinion from another tax professional with experience in these forms.

  • Terry

    One important point when trying to use the insolvency exemption. Your student loan debt should be included as a liability. In many cases this liability alone will be enough to exclude the cancelled debt from taxable income.

    • Gerri Detweiler

      You’re right Terry. The amount of the debt right before the cancellation is included in the insolvency worksheet.

    • Mark R. Fortman

      MUSIC TO MY EARS??? Having received an award of full-permanent disability about 6 weeks ago, I felt quite ill, subsequent to reading about the taxability of my pending student loan discharge, which in my case is in excess of $160,000. Now however, I am feeling a whole lot better. Given that you are saying the loan balance may be considered a liability and used to offset the income from its dissolution, I’m again becoming optimistic, albeit a bit cautiously, with regard to my financial future! I will have to seek someone more knowledgeable than myself with regard to the tax issues regarding insolvency and this “offsetting penalties” issue. Given the possibility of being stuck with the tax bite on160K, I must be certain all i’s are dotted and t’s crossed. While still riding the high as a result of my recent award and pending discharge of 160K in student loans, I can’t tell you what a roller coaster ride, reading about the potential tax ramifications issue, from beginning to end, has been. I can’t take much more of this, my very weak, disability yielding heart is still fluttering. Now, I need a smoke!!!

  • Heidi

    My husband and I both have student loans. We are teachers, and he is a volunteer firefighter also. Our 12 year old son is medically compromised, is fed through a g/j tube, has a genetic anomaly (duplicated gene on chromosome 12), among other things. We have paid our loans diligently and I have spoken to the loan companies many times about at least reducing the interest rate since the payment each month only covers the interest. Combined we still owe $120,000 (approx) and are scheduled to pay until we are 68! I have been paying on my loans for 10 years, my husband for 5. The loan company refuses to work with me to reduce the interest (thanks Federal Government) Is there any way we would qualify for loan forgiveness? My husband is also a veteran. Help!

    • http://www.credit.com Gerri Detweiler

      Heidi – Are you and he enrolled in Income Based Repayment? If you qualify then your balances will likely be forgiven after 10 years. In addition there are other loan forgiveness programs for teachers, but you are going to have to do some research to see if you qualify. For example, here is one federal program. Your state may have similar programs as well but you may need to do some digging to find them.

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  • kidsandliz

    I guess the only solution to all the student loan problems some of us have is death – ours. Clearly our lawmakers have no clue what life is like if you are not a millionaire. Geesh.

    • Mark R. Fortman

      I say we organize a rally that results in some changes, specifically, changes in the health status of some, if not all of our politicians!!! I’m really sick of having the best government, that money can buy.

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  • Deanna Templeton

    Unfortunately, as a co-signer, you’re both on the hook. There’s really no way out of it unless your ex-wife agrees to refinance the loan entirely in her name. It’s a catch-22, and one of the primary dangers of co-signing. It’s also the primary reason why divorce ends up trashing both spouse’s credit. For more on both issues, here are three resources that will explain both in more detail:

    My Divorce Ruined My Credit!s
    When a Deadbeat Partner Ruins Your Credit
    Should You Pay off Your Ex’s Credit Cards?

    At this point, if you stop paying, and she refuses to make the payment, you’ll both suffer the credit damage. In an ideal situation, you’d be able to negotiate with her so that she contributes something towards the debt, but as far as making her accountable — she already is. It’s just that you’re saving her credit, as well as your own, by making the payments for both of you.

  • http://www.credit.com/ Credit.com Credit Experts

    Ann – as a co-signer, your father is just as liable for the debt as the primary account holder (you). If you die, the debt isn’t wiped out — he’d be liable for the outstanding/remaining amount. The same goes if he dies, the loan is still in your name as the primary so you’ll still be liable for the debt as well.

  • Gerri Detweiler

    Ann -

    With federal student loans, if the borrower dies the debt is cancelled. With private student loans it depends on the lender’s individual policy.

    We have received a few complaints from co-borrowers who received 1099-Cs after a student loan was cancelled due to the death of the primary borrower. We have not investigated this thoroughly yet but there is no specific exclusion for this type of cancellation of indebtedness income (CODI) so we have to assume that it is treated like any other CODI. That would mean the coborrower would either have to include this amount in taxable income or demonstrate that he or she meets the IRS standard for insolvency.

    The fact that you say you are “paying a little more” for this, however, makes it sound like perhaps you are purchasing some type of credit “insurance” or protection that pays the balance if the borrower dies. If that’s the case, then that would be a different situation. To my knowledge that would not trigger tax reporting, but I am not a tax professional so you’ll want to clarify that someone who is.

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  • Mary Logue

    Been sick since I was three years old and became disabled at age of thirty one. Worked enough to qualify for SS so always worked hard up till then. Working people are mad (and jealous) at those unable to find wealth through employment due to lack of jobs or disability. The American view of people like us is we are lazy. They did it on their own Never mind they were not born in the inner city, poor, to drug addicted parents in a crime infested jobless neighborhoods with life long, life altering disease. If you were born that way it’s your own fault and they are going to punish you.They wish they could sit around doing nothing all day. I sat on a dialysis machine for years and I wish one of them had taken my place. If you think our democratic government does not adhere to this policy think again. Almost no elected official in America is not born without money. Now you want to get out of paying your loan? They feel you should continue to struggle paying back money on loans used for degrees you cannot benefit from since you cannot work. I feel each official involved in creating policy on TPD forgiveness should undergo the medical procedures of each applicant they are considering granting forgiveness to. Bet they grant it real fast.

  • sir taxed-a-lot

    I was notified this past August that I had been “awarded” a full and permanent disability. The claim states my disability began as of 12/16/2013 and it had a 5 month waiting period until I began receiving monthly checks. In my case, I am looking at filing for discharge of a student loan balance of $160k. My wife and I earned about $70k in 2013. Would the coinciding 1099c result in an increase in income for 2012 or 2013? Were I not to file for the charge-off due to disability for several years, is it the 1099c back-dated. If not, one might, at the very least, escape the state income tax in a state, such as TX, which has no state income tax. Also, were we to file bankruptcy now, there is the possibility the student loan balance could be charged off, but if not, would this nonetheless, aid with an insolvency claim? At this point, I have until the end of the year before I have to start making payments again and I’m attempting to explore any and all options. Any help would be greatly appreciated!!!

    • http://www.Credit.com/ Gerri Detweiler

      The year your student loan debt is discharged should be the year you receive a 1099-c. (Though I’ve seen these forms come out years later.) It has nothing to do with when you were awarded disability income.

      But remember you may avoid paying taxes on that income if you are insolvent, and you calculate insolvency right before the debt is discharged. It isn’t based on your income – it’s a calculation that compares your assets versus your liabilities. The worksheet can be found in IRS Publication 4681. I’d encourage you to take a look at it then consult a tax advisor.

      As for bankruptcy, if you are able to discharge a debt in bankruptcy then that cancellation of indebtedness income can be excluded (you don’t have to pay taxes on it). But that assumes you get the student loan debt wiped out in bankruptcy which is very hard to do.

      I would strongly encourage you to talk with a tax advisor who understands these forms. You are talking about a lot of money here, and a potentially large tax bill. I understand it may be difficult to come up with the money to pay a tax professional, but maybe they will let you make payments. Now is the time to look.

  • LCH77

    My ParentPlus for my first child loan was discharged due to my TPD as I cannot work anymore. I recognize that I will receive a 1099-C for 2012 that will not only increase my Tax liability but will increase our FAFSA EFC for the second child. Neither seems very fair.

    The question I have is what happens should I recover and start working again within the next 3 years? While this is unlikely, I wonder how this situation would be addressed by the IRS.

    I understand the debt is reinstated and I am not liable for the interest for the period between the application and reinstatement. However, it seems as if you should be able to get the additional income tax returned but I don’t see how or where this would be entered. It doesn’t sound like you would enter the discharged amount as a negative value in Line 21 the following year (or whichever year employment resumes) but I don’t see anything on Form 982 that addresses this situation. Any idea on how this would be handled?

    • http://www.Credit.com/ Gerri Detweiler

      I wish I knew. I haven’t encountered this situation before. Have you tried to figure out if you are eligible to exclude this “income” due to insolvency?

      • LCH77

        Nope. While we owe a lot on our mortgage, we are not underwater and have enough in savings to pay the mortgage for 2 years.

        Even though they are allowed to make an adjustment, the biggest problem is our college loan officer will count the CODI as income. I had hoped that it would longer for the Dept. of Education to make their decision and the CODI would apply in 2014 instead of 2013.

        There must be an exception to cancel the CODI. Foe example, the IRS instructions state if they continue to try to collect the debt, it hasn’t been discharged. That’s fair but if the IRS receives a 1099-C, how would someone be able to challenge that situation without writing a separate explanation?

        Also, the IRS says you do not have to include CODI if the payment would have been deductible. Well, part of this loan was accrued interest that would have been deductible. There needs to be a place to show that portion, but I can’t find it.

        Thanks for your help. I’ll post how I addressed this after I prepare our return.

        • http://www.Credit.com/ Gerri Detweiler

          I’ll run it by some of our tax experts too. This has created problems the IRS never imagined.

          • LCH77

            One solution would be to have Nelnet (or whoever) NOT issue the 1099-C until after the 3-year monitoring period is over. One could argue that if they can reinstate the debt, it hasn’t been cancelled, it has been suspended.

          • LCH77

            I found this statement in a Tax Court case:

            The moment it becomes clear that a debt will never have to be paid, such debt must be viewed as having been discharged. The test for determining such moment requires a practical assessment of the facts and circumstances relating to the likelihood of payment.

            It’s located on this IRS page: http://www.irs.gov/pub/lanoa/pmta2009_151.pdf

            Based on the discharge being contingent on a 3-year monitoring period, I would say it is not clear that debt will not have to be paid until after the 3-year period has been completed. Problem is you probably would have to go to tax court to demonstrate the facts.

          • http://www.Credit.com/ Gerri Detweiler

            I think you nailed it on the head: without guidance from the IRS or another authority you have to go to tax court to argue the situation. (And it’s confusing either way – if you do complete the three-year monitoring period then an argument could be made that it started the first year no??) Anyway, thanks for weighing in and I will do some digging.

          • liz4

            Wanted to say I’ve been in touch with Sen Susan Collins (ME) office and she is sponsoring a bill in 2014 that will allow folks to pay taxes on forgiven student loans over a period of up to 10 yrs. She has support from some colleagues.They say she has received numerous calls this year from people like us who are disabled but now facing 1000s of dollars of taxes. She says changing the rules on paying the taxes would be much harder to accomplish (if not impossible) than at least allowing it to be spread out. Say it’s someone like me, with 33k in loans forgiven. The income would be 3,300 a year for 10 yrs, which would be negligible income for most folks to deal with on their returns.
            Anyway, wanted to let you know. Won’t help us who already have it but if you are thinking about doing it, it might be worth watching for it next year.

  • http://www.Credit.com/ Gerri Detweiler

    We wrote about Social Security Disability income here: Your Social Security Disability Income Is Probably Safe…For Now

  • http://www.Credit.com/ Gerri Detweiler

    I am sorry I am having trouble understanding your question. Are your student loans federal or private? This is a key question because there are different consumer protections depending on which type of loan you have. If you don’t know, use the National Student Loan Database to find out. We can’t really provide any feedback without knowing what type of loan you have.

  • http://www.Credit.com/ Gerri Detweiler

    Here’s what I think is the important question – will you qualify for the insolvency exclusion if you calculate it in 2012 right before the initial discharge? If so then file Form 982 and put it behind you. (Also I am confused – if they said TY 2012 then you should have received it last year – by the end of January 2013. Did you get it then? How did you handle it with your taxes?)

    If your goal is just to postpone having to deal with this for another couple of years so you can deal with it later, then you can try to fight it.

    • LCH77

      Sorry for my mistake. The loan was suspended (they call it discharged) in 2013 not 2012 so I expect to receive a 1099-C soon. I do not qualify for insolvency.

      Should my next action be to write to nelnet (as the processor for the Dept. of Education) showing them the link to the ruling of the Tax Court?

      As posted below, the Court ruled “The moment it becomes clear that a debt will never have to be paid, such debt must be viewed as having been discharged.” Since nelnet monitors your ability to repay it for 3 years means the debt could be reinstated. Therefore, my position is it is not clear that it will never have to be paid until after the end of the 3-year monitoring period in 2016.

      While improbable, it is possible that my disabling condition could improve enough to start working again within the next 3 years. I believe an annual income in excess of around $15,000 (poverty level for a family of two) qualifies as sufficient to reinstate a Student Loan.

      • http://www.Credit.com/ Gerri Detweiler

        You can try but my guess is they have made a high level policy decision here and you may have to take your case to Tax Court to force them to change it. But that’s just my assumption.

        I wonder whether it would be better for you to go into IBR with a low or zero payment rather than having your loan discharged and creating a tax liability? How much are you talking about here? Did you look into IBR before applying for the disability discharge?

      • Susan Burns

        Why did you not qualify for insolvency?

  • reiscr

    Why are you suing Nelnet? All they are doing is what they are supposed to do, which is to pass the 1099-C and enforce the Internal Revenue Code? I am a Professional Tax Preparer and KNEW the debt was coming – fortunately I was able to prove insolvency! Ever hear of an Insolvency Worksheet? This form determines to what degree you are insolventand how much in taxes you WILL owe to the IRS!!

    • walnutz2u

      A professional tax preparer would probably be very well informed on student loan debt cancellation issues. Most people don’t have a clue as to the problem with these loans to begin with which is the capitalization of the interest rate once someone goes into default. That’s why these loans are so high to begin with. I don’t understand how someone on SSDI could possibly pay tax on a cancelled 91K loan.

  • G Augusto

    There is a bigger nightmare to be added to this thread… I have also just received a 1099 c from NELNET in connection to my student loan being cancelled due to permanent disability (I am post-polio).
    In checking things, I called Nelnet, and talked with one of their representatives about the loan discharge.
    It appears that there is a HUGE catch 22 involved in this as:
    a) The specifics of the discharge due to permanent disability calls for monitoring of income for three years after the discharge.
    b) If my income goes above the poverty line for a household of two, I am immediately liable for repaying the loan.
    c) OF COURSE, since I have to report the loan discharge as income, my factual below-the poverty-line income is suddenly in the six-figures!!!
    d) According to the rules, this could negate the discharge PLUS there is a chance that my having to report this fictitious income may make me liable for re-paying any and all assistance I have received during the year from Medicaid and Medicare.
    This means that, even though I am factually living below the poverty line,
    1) I have to somehow pay over $ 16,000 in taxes;
    2) I might might have to repay over 1$ 2,000 in benefits I received during the year; and what is worse,
    3) Since I am suddenly a wealthy person, ALBEIT IN PAPER ONLY, I may even lose the assistance I so-badly need since I no-longer qualify under the guidelines due to the illusory six-figure income!!!
    I am 62 years old; and have lost all my savings during my drastic-stages that led to my total disability. I can only work a few hours per day; from the home; and mostly on a good day. My stress level is now going through the roof :-( :-( :-(

    • http://www.Credit.com/ Gerri Detweiler

      I am not sure you’ve been given correct advice. My understanding is that your loan can be reinstated if your income from work puts you above poverty level. But I don’t believe that 1099-C “income” would qualify for that purpose. I can’t say for certain yet (looking a little deeper) but I think you may have been given inaccurate advice. Don’t give yourself a heart attack yet.

  • LCH77

    I spoke with nelnet and they said the debt was “approved’ for discharge on 9/30/2013 but that doesn’t matter because I have just received my 1099-C. It has a discharge date of 11/6/2013.

    The good news is I have found tax court cases where the issuance date on the 1099-C is NOT necessarily the date where it becomes “clear that a debt will never have to be paid.” However, it appears that the taxpayer might have to demonstrate that there is a reasonable possibility that the debt might be reinstated.

    Either way, it looks like that a statement needs to be attached somewhere to your 1040., I just haven’t found where.

  • Susan Burns

    Ok. Here is my question after reading all the comments. How does one KNOW when “right before” is regarding sending off for, filling out, and sending back in the insolvency worksheet before TPD actually discharges your student loan debt? I mean, we have no way to KNOW exactly WHEN they will discharge it, if they do, that is. How would one go about estimating this dance with time? Especially if you are not CERTAIN as to the discharge date, particularly if it is close to the end of a particular year. In other words, you definitely would not want to fill the insolvency sheet out and send it in, say, in December and then you don’t actually receive your discharge of the loan until January of the next year. Am I making any sense?

    • http://www.Credit.com/ Gerri Detweiler

      You are Susan. I am trying to dig a little deeper into this issue. Certainly not easy is it?

  • http://www.Credit.com/ Gerri Detweiler

    Susan – You can go over the the insolvency worksheet yourself to see if you qualify. It is in IRS publication 4681 which is available at IRS.gov. From what you are saying it certainly sounds like you will.

  • http://www.Credit.com/ Gerri Detweiler

    Susan – Fill out the insolvency worksheet in IRS publication 4681. If you qualify, you will file Form 982 and claim the insolvency exclusion. You don’t have to include the worksheet but I’d suggest keeping it as a reference in case the IRS comes back to you. (Caveat – I am not a tax professional – so please don’t take this as professional tax advice.)

  • http://www.Credit.com/ Gerri Detweiler

    I am so sorry I confused you Susan. Wait until you get the 1099-c. You calculate the insolvency based on the amount of debt you owed before it was discharged. I will have a story coming up shortly on the timing. But you can’t file Form 982 until you get a 1099-C. It goes with your tax return.

  • http://www.Credit.com/ Gerri Detweiler

    First, if the amount of the 1099-c combined with any other income does not put you above the threshold where you need to file a tax return then you don’t have to worry about it.

    If it does, you include the amount of student loan debt cancelled as a liability. I don’t think you can file Form 982 without filing a tax return,but to be sure I’d suggest you call the IRS and ask them. Some of our readers have found them very helpful in these situations, others less so.,

    Will you let us know what you find out?

    • Ann

      Thank you, Gerri. I called 3X and they sent me to “Social Security Pensions” once. They did send me to 1009 but that’s automated. And they send me to 982, which is also automated. I’m supposed to call an old friend who’s a CPA and does corporate taxes this afternoon, but heck, he may not know about the 1040 form. But am going to ask. I will let everybody know what I find out. Again, thank all of you! And will update as soon as I know.

      • Ann

        Just spoke with old friend’s (CPA) wife–he’s not in this afternoon–but she’s also a CPA. She expressed empathy and then said to fill out the 1040 with “0′s;” sign it. Fill out 982 for insolvency in Part I 1b; in line 2 of Part I list the amount of debt cancelled, which is is the lesser amount of liability after subtracting assets. She also said that she would not send in the Insolvency Worksheet with the form. She said that she would not send in proof of SSI-DI earnings. She did not think Part II of the 982 was something to bother with, but to double-check all of this with him in the morning; she assured me that he will be in. But she concurred that the day before the date of discharge, the loan was a liability contributing to insolvency.

        Will update to clarify if he tells me something more helpful (or different) and again, thank all of you!

  • http://www.Credit.com/ Gerri Detweiler

    Believe me, plenty of people have reason to fear a worse case scenario when they get these forms. Hopefully that’s not the case for you. Remember you may be eligible for free or low-cost tax help due to your financial situation and disability.

  • http://www.Credit.com/ Gerri Detweiler

    The 1099-C has been sent to the IRS and you must either include it that amount in your taxable income when you file your return for the applicable year (whatever tax year the 1099-c was filed for) or show why you qualify for an exclusion, which in these situations is usually the insolvency exclusion. You’ll find more step-by-step instructions in this article:

    1099-C
    In the Mail? How to Avoid Taxes on Cancelled Debt

    • Russ

      Does this 1099 c amount also affect my Ohio tax?

      • http://www.Credit.com/ Gerri Detweiler

        It may. States with income tax often also count 1099-C “income” as taxable income.

    • Russ

      Also “insolvency”? My wife can’t work. I receive a monthly retirement pension and work part time at walmart now. If my wife filed the 982 form, would she have to include retirement income and walmart income I receive? She went through a bankruptcy several years ago, but our house we’re paying on was not part of that because her name is not on the mortgage, but on the deed only. She is a beneficiary to my retirement at my decease to continue receiving the same amount per month.
      So many thanks,
      Boggled

      • http://www.Credit.com/ Gerri Detweiler

        Income is not an issue here, It’s a calculation of assets versus liabilities right before the debt was discharged. Calculating the value of retirement benefits can be very challenging – you may need to consult a tax pro on that.

  • http://www.Credit.com/ Gerri Detweiler

    Ann – what is the amount of the 1099-C? Your liabilities must exceed your assets by that amount or more in order to exclude the full amount of the 1099-C “income.” If they don’t, then you can claim a partial exclusion to the extent that you are insolvent. I just want to make sure you understand that.

    Yes, according to Publication 4681 you do calculate insolvency right before the loan was cancelled so you would include that debt as a liability.

    The tax pros I have spoken with said you don’t need to file the worksheet or the supporting documentation. Keep it for your records. As a rule, it’s not a good idea to share information with the IRS that is not needed or requested.

    I hope this helps. And remember you are likely eligible for free volunteer tax assistance though it sounds like you are on the right track.

    • Ann

      Hiya Gerri!

      Since the amount of the 1099-C was over 100k, which is included as a liability on 982, “prior to,” cancellation of that debt, that amount of debt alone makes me insolvent since I don’t have many assets. But I do have other liabilities, which I had to go back, using the date “prior to” “the identifiable event,” tracking down records of what owed and value of what owned, and did it that way, since Jan. 2013 is not current.

      We’ll see what happens and thank you!

  • http://www.Credit.com/ Gerri Detweiler

    Yes, that is my understanding.

  • http://www.Credit.com/ Gerri Detweiler

    And the debt has not been truly cancelled so she still faces collection efforts.

  • Travis

    I discharged mine but needed to prove” insolvency ” with the IRS which is easy to do if one receives SSI or SSD and has little or no assets..Its wise to used a licensed tax accountant to file 1040 long form with the insolvent worksheet to be attached..

    • http://www.Credit.com/ Gerri Detweiler

      If you can fill it out yourself you don’t have to use a tax professional, but if you are unsure or have questions, it’s a good idea to get professional advice. My understanding is that you do not need to include the worksheet with Form 982 but that you should keep a copy if the IRS ever questions it. You can double check with the instructions found in IRS Publication 4681

  • Sbmike

    My wife had her students loans discharged. We file jointly. When calculating insolvency, do I only include debt with her name attached to it? For example, I have my own student loans and my wife is not a co-signer. Could that be included?

    • http://www.Credit.com/ Gerri Detweiler

      This is a tricky area. We tried to address the issue of spouse’s income in the following article. Given that it is probably a large amount (most student loan disability discharges are) you will likely want to consult a tax professional.
      Form 982: The Way to Battle a 1099-C

      • sbmike

        Thank
        you for the quick reply. My thought was that if:

        1. we file jointly;

        2. we can deduct from “our” tax liability the amount of interest paid on “my” student loan; and

        3. my pension can be included as her assests, then…

        my student loans should count as her liability.
        Or perhaps, either my pension should not be included in her assets, or my students loans should be included in her liability. I cannot find any instructions on “what counts as liabilities.” Could you suggest any other resources?

        • http://www.Credit.com/ Gerri Detweiler

          In reading Dan Pilla’s book on this subject, he doesn’t answer your exact question but he does note you should make sure you list the liquidation value of your retirement funds. If you would be subject to taxes and penalties for withdrawing those funds now to pay the debt then list the amount you would actually receive.

          Did you read the instructions on page 6 of Publication 4681? It would seem to indicate that if the debts that were cancelled were her own then she completes the worksheet for herself. But it is not clear on how to treat joint assets or liabilities. Aggghh!!! My best suggestion is to find a tax pro who really knows these forms to walk you through it. If you learn something useful, we’d really appreciate it if you can share it here.

  • http://www.Credit.com/ Gerri Detweiler

    Everyone who has over $600 in debt cancelled is supposed to get one of these forms. Have you tried filling out the insolvency worksheet in IRS Publication 4681 to see if you qualify for that exclusion?

    • latxguy

      thank you for the information. I will go to the IRS to check this out. I have in my paper work for myself have made a plan to pay 500/month to the IRS. I think with my part teacher retirement and military along with disability they will say I have the ability to pay and that is that with them. I am going to look for whatever write offs I may have. I am worried that I have most of my house paid for and they will see this as asset. Thanks Gerri.

      • http://www.Credit.com/ Gerri Detweiler

        Yes unfortunately home equity is considered an asset. CPA Dan Pilla advises in his book about 1099-Cs that you make sure to value your assets at their liquidation value.

        • latxguy

          I just hope that as long as I make payments they do not try to take my home!! OMG. I am retired and disabilied.

  • Ann

    Yes; Stephanie. Old friend, CPA, said to INCLUDE student loan debt cancelled on 1099-C from Nelnet. PRIOR to cancellation, student loan was a DEBT OWED. A LIABILITY. It contributes to Insolvency amount on 982.

  • http://www.Credit.com/ Gerri Detweiler

    I am so glad to hear that.

  • Name

    I am doing Turbo Tax. It doesn’t show calculations using the insolvency worksheet or the 982. My total amount of insolvency from the worksheet is higher than the 1099-c cancellation of debt for student loans. I am disabled on ssdi. My question is: If the insolvency is higher than the cancellation of debt, then it is not considered income? One more thing. I am married, but our mortgage isn’t under my name. Since we are filing jointly, is that still a liability? Also, do I include my husbands student loans under liabilities or is this strictly a worksheet for me.

    • http://www.Credit.com/ Gerri Detweiler

      I believe TurboTax does support this form but you will need to ask them your questions about how to use it within their platform. If your insolvency is higher then the amount of cancelled debt then, yes, you can file Form 982 and claim the full insolvency exclusion. As for your question about the mortgage, that’s a good question and I don’t know the answer. To my knowledge that hasn’t been addressed under the examples the IRS gives for filling out this form. I will have to suggest you ask it of TurboTax or talk with a tax professional with experience in these forms.

  • Mark

    Hello Gerri,

    For the past 2 years the IRS has been keeping my income tax refund due to a cancelled student loan. The interesting thing is that at the beginning of those 2 years the lender sends me a letter stating that the student loan was cancelled, and because the amount was less than $600.00, the lender will not issue a 1099-C, instead the lender issues’ a 1098-E that equals the amount that IRS took from my refund. At this point, I’m very confuse. The IRS says to contact the lender, and the lender says that there is no outstanding debt to report…I’m not sure what to do at this time, please advise. Thank you. Mark M.

    • http://www.Credit.com/ Gerri Detweiler

      Are you sure it is a cancelled student loan and not a defaulted student loan? If it were cancelled there would be no need to take your tax refund.

  • Anonymous

    Hi,
    The 1099-C will have an actual date of discharge in box 2, that is the actual date, but it is very close to that letter from Nelnet, maybe a day or two off.

  • http://www.Credit.com/ Gerri Detweiler

    If you qualified for the discharge in 2013, then you should have received a 1099-C by now for the 2013 tax year. (The IRS requires those be sent to borrowers by Jan. 31st.) I’d suggest you contact Nelnet to find out. Typically, the date of discharge will be when you qualified for the discharge. As the other commenter noted it should be on your 1099-C.

  • Heath

    nicely said

  • http://www.Credit.com/ Gerri Detweiler

    This issue of spouse’s assets when calculating insolvency is the one issue I have not been able to get clear advice about. I am still researching it. Sorry I can’t be of more assistance at the moment.

  • http://www.Credit.com/ Gerri Detweiler

    Rachal – I am assuming you didn’t qualify for the insolvency exclusion on this? Who is the law firm representing you? Other readers may be interested in that information.

  • http://www.Credit.com/ Gerri Detweiler

    Jim – Several other readers asked the same question. When I looked into it I found that they consider the student loan discharged immediately – not after the three-year monitoring period. The discharge can be rescinded during that three year monitoring period. If you were to no longer qualify then you could presumably amend your tax return if you did owe taxes as the result of this.

    I am not saying it’s fair – why should it all be taxable in one year for example? – but my understanding is that it will take legislative action to change it. That means borrowers like yourself are going to have to speak to their legislators if they hope for some relief.

  • http://www.Credit.com/ Gerri Detweiler

    You have to fill out the insolvency worksheet based on your assets right before your debt was discharged. If you owned a home and had equity in it at that time, that equity would be considered an asset. But remember that fair market value can be somewhat difficult to pin down in some cases. And don’t forget to include any mortgage or debt associated with the property as a liability. I hope that helps!

  • http://www.Credit.com/ Gerri Detweiler

    My understanding is you file Form 982 showing the amount you are claiming with the insolvency exclusion. (Line 1 b.) You keep the worksheet with your records indefinitely in case the IRS questions your tax return.

  • Dan

    What if both the parent and student receive a 1099-C for a loan default and they are the same amounts. The parent did cosign and the student defaulted. They both received a 1099-C for same amounts, Now which should report? The parent are higher income and it will cost them $$, the student is lower income and maybe should report but both?? They are having tough time determination of the Amount of default is NOT both but one? or both? Yes, its confusing!

    • http://www.Credit.com/ Gerri Detweiler

      In IRS publication 4681 it says:

      Persons who each receive a Form 1099-C showing the full amount of debt. If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. However, you may not have to report that entire amount as income. The amount, if any, you must report depends on all the facts and circumstances, including:

      State law,

      The amount of debt proceeds each person received,

      How much of any interest deduction from the debt was claimed by each person,

      How much of the basis of any co-owned property bought with the debt proceeds was allocated to each co-owner, and

      Whether the canceled debt qualifies for any of the exceptions or exclusions.

      It goes on to provide an example, I don’t think it is super clear, but it may be possible that the student can claim the insolvency exclusion.

      However, the bigger question is why you are receiving a 1099-c for a student loan in default. Unless it is a private loan, they can and will continue to try to collect. I think you are going to need an experienced tax professional.

      This article may be helpful:
      The Little-Known Form for Avoiding a Big Tax Bill

  • http://www.Credit.com/ Gerri Detweiler

    Robert – I am so sorry to hear of your wife’s death and to hear that you are dealing with this now. Was this your wife’s individual debt or were you a cosigner? If it was a joint debt then the IRS gives some guidelines for handling joint accounts in Publication 4681. If not then it is possible her estate qualifies for the insolvency exclusion, also described in Publication 4681. You are probably going to need to get some professional tax advice here to make sure this is done properly.

    • Robert

      Thank you for the reply. No, I was not a co-signer. Strictly her debt, which was extinguished after her passing. I looked at the insolvency exclusion, but the debts have to exceed assets. There are zero assets and zero debts, so not insolvent, apparently. Neither my attorney, nor my CPA can seem to find a solid answer or guidance from the IRS. If filed on a 1041 estate tax return, it generates about $14K in tax. There are no funds in the estate, and I can’t pay, and not sure I have to. But ignoring seems like a bad thing….I guess I’ll keep looking – thank you.

  • http://www.Credit.com/ Gerri Detweiler

    If it was discharged then I see no reason why it should have been “sold” or interest subsequently charged. Have you shown Nelnet the discharge letter? Try dealing with them by certified mail and if they continue to give you problems file a complaint with the Consumer Financial Protection Bureau.

    • Leo Filon III

      I wonder if all that has to do with their 3-year “monitoring period” after discharge? Disability Discharged student loans must be one of the more rarefied forms of high-risk speculation that got our economy in this permanent rut 7 years ago…!

  • http://www.Credit.com/ Gerri Detweiler

    For federal tax purposes the worksheet is in IRS Publication 4681 but I don’t know the rules for California, though it appears they follow the IRS guidelines based on this information: https://www.ftb.ca.gov/professionals/taxnews/2013/February/Article_6.shtml

  • Leo Filon III

    Hi. The one fact I’ll add is that it seems the insolvency you refer to on the forms is _AS OF right before the discharge_, even tho you’ll be filing the forms with your next April 15′s taxes. I think they want to know that you were insolvent already when you received the discharge, IOW before it, even tho you’re not telling them about that perhaps momentary fact until some months later, when most of us are filing our taxes for that year. So I guess it’s easiest to tally up all your assets and liabilities as described in the IRS’ literature before even putting in for the discharge — unless your recordkeeping is already so good or simplified that you can let that slide till after you’ve gotten the discharge, and are doing your taxes next, and then do it first, _looking back TO the moment before you received the discharge_.

    I’m venturing into this new myself, but this is what I gather from looking thru IRS literature as a disabled M.A. in Religion and ex-journalist (i.e., not a tax pro or lawyer!)… afflicted _right_ after finishing 6 yrs of grad school, during my _first_ week of work, w/o having really dented my undergrad debt along the way! No I wasn’t planning on having to make 100 grand my first week outta grad school — Such poor planning on my part! o_O

    Hope this is helpful….

  • Leo Filon III

    “Calling a discharged loan you cannot pay because of total disablility income…”

    …It actually, and not metaphorically, adds insult to injury! Well put! It even risks adding _injury_ to injury….

  • Leo Filon III

    Forgive me if I’m insulting your intelligence … and I’ve never filed a Form 1040 myself either … but I think all these other forms are the little, complicated ones that go along with a 1040, on which I guess the debt is reported as income that is excluded by the stuff you put on the other form for them (and saved on the Insolvency Worksheet in case they ever need to see it). BTW that’s the real, whole 1040, not the 1040-A or 1040-EZ, which I don’t think we can use most other IRS forms in conjunction with(?). The 1040 is the one people can try to itemize deductions and things on that we can’t do on the EZ (I don’t even know about the A!).

    Since nobody said so specifically, I hoped it wouldn’t hurt to just add it in here….

    Good luck!

  • Leo Filon III

    This post AND actually MOST of the substantive Comments have been insanely helpful to me* in getting a handle on my situation. Depressing, angering, anxiety-provoking, and empowering, all at once, if you know what I mean?!

    And all I did was google student loan disability discharge taxable (w/o quotes)!

    *–I wanted to say “a goldmine,” but was afraid I’d have to report it to IRS and SSA as income, assets, and/or resources! ;)

  • http://batman-news.com Melissa

    Hello,

    Is there any feedback as to how this discharged is viewed for total and permanent disability based on a VA disability as noted in the letter received? Someone with a 100% VA disability rating qualified for a discharge and the letter received references the VA, and the term ‘discharge’…and they do make mention of a 1099-C. With a 91000.00 student loan discharge and a 1099-C to be anticipated…is the tax debt going to approximate 26000? What if the disability received through the VA is minimal enough for taking care of the medical and personal needs…will the IRS accept a form of a payment plan from now till eternity? Any response is appreciated. Thank you in advance.

    • http://www.Credit.com/ Gerri Detweiler

      Melissa,

      Unfortunately there is no exclusion specifically for student loans that were cancelled due to disability. You’ll have to see if you qualify for the insolvency exclusion. You’ll find the worksheet for that form in Publication 4681. You may want to read our first article on how exclusions work: 1099-C In the Mail? How to Avoid Taxes on Cancelled Debt

      If you do owe taxes as a result of this discharge, you may have to set up an installment plan with the IRS but it would be a normal installment plan, and you’d have to meet their guidelines.

  • Ann

    What Gerri said below: NNet did not buy loan debt: they only managed it.

  • http://www.Credit.com/ Gerri Detweiler

    I am really sorry but I don’t understand your question, or are you just venting? (I think there are many problems with these forms too!)

  • http://www.Credit.com/ Gerri Detweiler

    Have you tried filling out the insolvency worksheet in IRS Publication 4681? It may allow you to avoid paying taxes on this debt. If you can’t do it yourself you should be eligible for free or low-cost tax help: The Complete Guide to Finding Tax Help

  • Sandra

    Not knowing the details of anyone’s, but look into “uncollectable status” and “innocent spouse relief”. Perhaps one of these may provide some relief from a deceased spouse debt.

  • Heaven Malpass Blakes

    Hi this has been very helpful. When doing the worksheet..I assume your student loan counts as one of the debts since the worksheet is based on assests/debts BEFORE the discharge. ..am I correct in thinking this?? Thanks

    • http://www.Credit.com/ Gerri Detweiler

      Yes you calculate it right before the discharge. Glad it has helped!

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