Home > Taxes > What You Need to Know About 1099-C, the Most Hated Tax Form

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Taxes can get confusing — just looking at the names of some of the forms you have to fill out can be enough to get your head spinning. Like the 1099-C, for example. What is that, and why is it in your mailbox? Well, we’re here to help and answer all your 1099-C questions.

What Is a 1099-C?

“A 1099-C is a document sent by a bank when they have canceled a debt,” Craig W. Smalley, EA, founder and CEO of CWSEAPA, LLP and Tax Crisis Center, LLC, said. “For instance, if you have negotiated with your credit card company to pay them a lesser amount than you owe them, the difference would be reported on this form.”

Bruce McClary, the vice president of communications at the National Foundation for Credit Counseling, said this is an important reason to “be familiar with the tax consequences when considering debt settlement as an option. You don’t want to be blindsided by a costly IRS bill when you may already be struggling financially.”

Why Did I Get a 1099-C?

If you have had a canceled debt, expect to see a 1099-C arrive in your mail, as “the bank is required to send this form, because it is taxable income,” Smalley said.

According to the IRS, lenders file a 1099-C if you have $600 or more of debt that is canceled. Here are four common reasons that may be the case.

  1. You settled a debt for less than what you originally owed and the creditor picked up the remaining balance (debt forgiveness).
  2. You did not pay on a debt for at least three years, and there was no collection activity for the past year.
  3. Your home was foreclosed and your deficiency (the difference of what was owed and the value of the home) was either forgiven or you haven’t paid it.
  4. Your home was sold in a short sale, and you made a deal with your lender to pay less than what was due.

Still not sure why you received this form? Look for Box 6, which will give you a code explaining why the lender sent it. To decipher the code, you can reference Publication 4681 on the IRS website.

Do I Have to Fill Out a 1099-C If I Filed for Bankruptcy?

Just like with most things, there is an exception to the rule of all canceled debts requiring a 1099-C. Smalley said that “if a debt is canceled because of bankruptcy, you do not have to pay tax on it.” (Remember: Bankruptcy does have a major negative effect on your credit scores.)

If I Receive a 1099-C, Does That Mean My Debt Is Paid?

This depends on why you received the 1099-C in the first place. If it’s because you settled your debt, then yes, your debt is resolved. However, if it’s because you haven’t made any payments on a debt for three years and the debt collector hasn’t tried to collect recently (noted in Point Two above), then your debt is not in the clear and you may still owe.

What Do I Do If I Get a 1099-C for a Debt I Paid?

“First and foremost, contact the issuer of the 1099-C and ask them to make the necessary corrections,” McClary said. “They will need to send you a corrected 1099-C in time for you to file taxes.”

McClary also noted that if this request doesn’t work, “the IRS has a dispute process you can use. This requires that you reach out to the IRS and let them know you wish to submit a complaint about an incorrectly issued 1099-C. They will provide you with Form 4598 that you will have to attach to your tax return, along with any additional documentation that supports your claim.”

Do I Have to File a 1099-C in the Tax Year I Receive One?

Smalley said that, yes, you do have to file a 1099-C in the tax year you receive one. You can visit the IRS website for more details on filling out a 1099-C and getting it filed.

Is There a Statue of Limitations on a 1099-C?

“There is no statute, as the form is to be issued in the year that the debt is canceled,” Smalley said. If this isn’t the case for the 1099-C you received, contact the issuer or the IRS immediately to find out the reason you were sent a 1099-C and to remedy any problems.

If I get a 1099-C, Is That the Amount I Owe or the Amount I’m Paying Taxes On?

“It is the amount that you are paying taxes on,” Smalley said. “However, if you are insolvent, meaning you have more liabilities than assets, certain cancelations would not be taxable. You have to fill out another form, and you have to make sure that you have evidence to support that you are insolvent.”

How Does a 1099-C Affect my Credit?

The 1099-C form itself won’t have a direct impact on your credit scores. However, whatever behavior lead you to receive the 1099-C likely will be affecting your credit. For example, say you didn’t pay your debt and it was sent to collections. Having an account in collections can have a negative effect on your credit. You can read this guide for more information about how 1099-Cs (and the financial choices that led you to receive one) can impact your credit.

Curious about how your credit is fairing? Take a look at your free credit report summary on Credit.com and you’ll not only see two of your credit scores but also get some insights on what you’re doing well and what areas of your credit profile could use some work.

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  • Jim Saling

    I’m not sure why nobody has responded to your questions. I’m not an expert by a long shot but I would say that first of all, you need to file your taxes and need to file past taxes. You must file your taxes every year regardless of whether or not you had a job or any earnings. As a matter of fact, you may be missing out on money owed to you. You should seek out a free tax service in your community. You should be able to find one online or go to your local library and look at the bulletin board. As for the 1099-C, you are probably eligible for an exception but you must submit the exception (IRS Form 982). Hope that helps.

    • TjP

      I’ve been told that as long as I haven’t earned anything for the year, I didn’t need to file (thanks H&R block). We have contacted a CPA in the area and are just waiting for their callback to meet and get assistance with this. Thank you for the response, I really appreciate it!

  • Shirley Mattos

    My son passed away in June of last year and I had parent plus loans forgiving but I did not receive a 1099c for my taxes yet .What should I do .I don’t want to get a penalty IRS or late fee.
    The loans were discharge in September

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