Home > Taxes > 1099-C Cancellation of Debt—the Most Hated Tax Form

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Taxes can get confusing—just looking at the names of some of the forms is enough to make your head spin. Take Form 1099-C Cancellation of Debt for example. It reports canceled debt to the IRS. And the IRS considers that canceled debt to be taxable income that has to be reported on your income tax.

What Is a 1099-C Cancellation of Debt?

Craig W. Smalley, EA, founder, and CEO of CWSEAPA, LLP, and Tax Crisis Center, LLC, describes Form 1099-C as “… a document sent by a bank when they have canceled a debt. 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.”

What Craig leaves out is that the form applies only to the canceled debt of only $600 or more. It applies whether the debt is canceled or forgiven, which is really the same thing. The IRS defines canceled debt as “If your debt is forgiven or discharged for less than the full amount you owe, the debt is considered canceled in the amount that you don’t have to pay.”

What Craig’s comment also leaves out is that canceled debt is essentially money you’re earned because you haven’t had to repay it. So, it’s money in your pocket, hence to the IRS, it’s income—taxable income.

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

And expect to ensure the income from canceled debt reported on your 1099-C is included in your tax bill or falls under a provision that either:

  • Doesn’t consider that debt income
  • Allows you to exclude that debt as income

See Form 1099-C and How to Avoid Taxes on Canceled Debt for information on exceptions and exclusions.

Bruce McClary, the vice president of communications at the National Foundation for Credit Counseling, said the 1099-C 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?

Four of the most common reasons that debt is canceled are:

  • You settled a debt for less than what you originally owed and the creditor picked up the remaining balance, known as debt forgiveness. This can include personal credit card debt that is canceled.
  • You didn’t pay on a debt for at least three years, and there was no collection activity on that debt for the past year.
  • 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.
  • Your home was sold in a short sale, and you made a deal with your lender to pay less than what owed.

Still not sure why you received this form? Look at Box 6 on Form 1099-C. Box 6 shows a code that explains why the lender sent it. IRS Publication 4681 breaks down the codes as follows:

  • A—Bankruptcy
  • B—Other judicial debt relief
  • C—Statute of limitations or expiration of deficiency period
  • D—Foreclosure election
  • E—Debt relief from probate or similar proceeding
  • F—By agreement
  • G—Decision or policy to discontinue collection
  • H—Other actual discharge before identifiable event

Receiving a 1099-C doesn’t necessarily mean that your debt is paid or canceled. That depends on why you received the 1099-C in the first place. If you received it because you settled your debt, then your debt is resolved. However, if you received it because you haven’t made any payments on a debt for three years and the debt collector hasn’t tried to collect in the last year, your debt is not in the clear and you may still owe the lender money.

However, the debt hasn’t been canceled, so you don’t yet need to consider it as part of your taxable income.

What to Do if You Get a 1099-C

First, don’t panic. Some debt-related items aren’t considered income and therefore won’t impact your tax bill. Other items can be excluded as income.

One of the biggest exclusions is canceled debt when you were insolvent—in other words, broke. If you can prove a debt was canceled due to insolvency, you don’t have to include that canceled debt as income or pay taxes on it. Smalley said, “… if you are insolvent [one of, 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.”

Debts discharged due to a bankruptcy aren’t reported as income either. Additionally, any student loans that are forgiven after you have worked in your field for a specific amount of time also don’t include any of the canceled debt as income.

See Form 1099-C and How to Avoid Taxes on Canceled Debt for information on these and other exceptions and exclusions, including bankruptcy and certain student loan debt.

Next, make sure you file with your 1099-C in the year you receive it. You 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.

Finally, understand the amount on the 1099-C is the amount you’re expected to pay taxes on. However, there are those exceptions and exclusions.

There’s No Statute of Limitations on a 1099-C

As long as a debt has not been paid or canceled, there’s no statute of limitations on when a lender has to submit a 1099-C. If the lender files a 1099-C with the IRS, however, they have until January 31 to have it in your mailbox.

You can receive a Form 1099-C on an old debt at any time. The lender isn’t required to file a 1099-C if it still wants to collect or to notify you if it has intended to stop trying to collect. The lender can continue trying to collect indefinitely. That’s good for you only in that the canceled debt doesn’t then become income you have to pay taxes on.

If You Get a 1099-C on Debt You Paid

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

McClary also noted that if asking for a correction 1099-C 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.”

How Does a 1099-C Affect my Credit?

The 1099-C form itself doesn’t have a direct impact on your credit score. However, whatever behavior lead to your receiving the 1099-C likely will affect your credit. For example, say you didn’t pay your debt and it was sent to collections. Having an account in collections has a negative effect on your credit. See Will a 1099-C Hurt My Credit Score? For information.

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.

This article was originally published January 26, 2017, and has since been updated by another author.

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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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