1099 C Cancellation Of Debt Common Questions

Last Updated: March 26, 2025

Disclaimer: We are not qualified tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.

Debt forgiveness may come with a tax consequence. In other words, forgiven debt is potentially taxable income. If you are considering debt forgiveness like debt settlement, or have forgiven debt, you need to understand the possible tax consequences of debt forgiveness.  Additionally, understanding all aspects of credit card debt forgiveness can provide you with a broader perspective on managing and navigating through your debts effectively. You may find our detailed guide on Understanding Form 982 and Form 1099-C helpful in this context.

In a previous blog post, we discussed the consequences of debt settlement. In this blog post, we will discuss the Form 1099-C tax form and federal tax filing. If you're interested in negotiating your own debt settlement, our article on Can You Negotiate Your Own Debt Settlement provides valuable insights and tips.

Disclaimer – We are not lawyers or tax professionals and we do not provide legal advice or tax advice. These are merely some options and information about taxes and the tax code. Consult an attorney or tax preparer in your area to determine all your options.

What is a 1099-C tax form?

The Form 1099-C is an Internal Revenue Service (IRS) form that is used to report “Other Income” from canceled or forgiven debt income over $600. A lender who canceled debt over $600 will generate a Form 1099-C and send tax forms to both the IRS and you. In most circumstances, you will need to declare this other income on your income tax return for the calendar year.

This is commonly known as the debt forgiveness tax and is something you will need to consider before pursuing cancellation of debt. Understanding how to utilize IRS Form 982 and navigate the complexities of 1099-C cancellation of debt is essential. For a comprehensive guide on this topic, take a look at our article on How to Use IRS Form 982 and 1099-C Cancellation of Debt.

If you do not get a Form 1099-C but you have a forgiven loan or canceled debt taxable income, you may still owe the forgiven amount on your income tax return. Always ask if the creditor will send you a 1099-C and make sure that the original creditor's name is on the Form 1099-C. 

When Will You Receive a 1099-C?

Any lender or creditor who cancels debt over $600 is required to generate a Form 1099-C and send copies to both the IRS and you. This typically occurs when:

• You settle a debt for less than the full amount owed
• A creditor writes off your debt as uncollectible
• You complete a debt management or debt settlement program
• Your home is foreclosed on or you complete a short sale
• A creditor cancels debt as part of a bankruptcy proceeding

You should receive your 1099-C by January 31 of the year following the debt cancellation. 

Important note: Even if you don't receive a Form 1099-C, you may still be legally obligated to report cancelled debt on your tax return.

Exceptions or Exclusions to Claiming a 1099-C

Under certain circumstances, you don't need to claim the Form 1099-C. We encourage you to talk to a knowledgeable tax expert before deciding that any of these exclusions include you.

The IRS is not very forgiving about honest (or dishonest) mistakes. 

Bankruptcy and Canceled Debt

Bankruptcy cancels most debt. Since bankruptcy has extreme financial considerations, it is not a suggested way to cancel your debt unless you are truly in a desperate situation. Bankruptcy stays on your credit report for up to 10 years.

We can explain your options to bankruptcy for free!

Insolvency and Debt Forgiveness

Insolvency, often the precursor to bankruptcy, is a common situation for many people. Declaring insolvency may be an exceptional situation that will change your need to claim a 1099-C.

Insolvency and working with creditors to pay off debt will most likely temporarily affect your credit rating. However, it will not have the long term effect that declaring bankruptcy does. Forgiven debt is usually considered as a insolvency exclusion, meaning that the forgiven debts may not be included as income.

The IRS has a specific definition for insolvency so if you are considering claiming insolvency you should know and understand the definition. A knowledgeable tax advisor is your best source of information. 

Student Loan Modification or Forgiveness

Certain student loan debt forgiveness may be excluded at the time of writing, however this is in flux. At present, these are the exclusions for student loan related debt forgiveness. Discover the truth about your options by reading our article on  Is Credit Card Debt Forgiveness Possible.

1. The student loan holder dies or develops a total permanent disability.
2. Certain student loans with loan provisions that allow cancellation based on working a certain amount of time in a specific profession.
3. Programs that forgive student debt for people providing health services in specific areas. 

Personal Loans

If a personal loan is declared a gift, bequest, devise, or inheritance and is forgiven, the amount is not considered income.

Cash Basis Taxpayers

A cash basis taxpayer is a person who reports gross income and deductions within the tax year, rather than waiting to pay taxes on April 15 of the following year. Cash basis taxpayers generally will not pay taxes on cancelled debt.

Mortgage Debt Forgiven

Mortgage debt forgiveness can occur when the seller gives a qualified purchase price reduction to the buyer. Check with IRS rules to see if this forgiven debt needs to be reported on a principal residence or vacation home.

Pay-for-Performance Success Payments as defined under the Home Affordable Modification Program are also not taxable. 

Certain qualified farm indebtedness or real property business indebtedness may also be excluded. 

For more details, check out IRS Publication 4681 (2018), Canceled Debts, Foreclosures, Repossessions, and Abandonments.

Again, make sure you consult your tax professional to find out all the facts and the best way of tax preparation to account for debt canceled in the tax year!

Qualify for Debt Forgiveness Exclusion!

If you check with a tax professional and you qualify, you get to fill out another tax form!

The Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) or Form 982 will need to be filled out and attached to your IRS return. 

I Think I Qualified but I Paid my Income Taxes Already

If you discover that you have paid on an excluded forgiven debt, you can amend your federal tax return retroactively for up to three tax years. Of course, there is another form to fill out, the Form 1040X, and you will need to provide documentation. Mail all this to the IRS or electronically file and you may receive a tax refund. 

A tax refund is a monetary refund that taxpayers receive from the federal or state government, in cases where too much tax has been withheld from their paychecks during the year. Tax refunds funds are usually distributed by check or deposited into the taxpayer's bank account.

Ask Before You have Debts Forgiven

If you are considering debt forgiveness, there is more to consider than just being debt free. The award winning account managers at Pacific Debt will be happy to help you understand the cancellation of debt, the tax implications, and the effect on your credit report.

They will explain which of the methods – credit counseling, debt consolidation, debt settlement, or even bankruptcy – are your best options.

Tax Implications of Cancelled Debt

When you receive a 1099-C, the cancelled debt amount shown in Box 2 is generally considered taxable income. This means:

• You must include this amount on your tax return
• This additional "income" could push you into a higher tax bracket
• You may owe more in taxes than anticipated
• State taxes may also apply to cancelled debt income

For example, if you had $20,000 in credit card debt forgiven, and you're in the 22% tax bracket, you could potentially owe $4,400 in federal taxes just from the debt cancellation.

Pacific Debt Relief offers a free consultation.

Debt Forgiveness Calculator & Resources

Below are several debt forgiveness calculators or worksheets that may help you decide about debt forgiveness. 

1. Credit Card Interest Rate Calculator
2. Student loan debt forgiveness for those in certain professions
3. Insolvency worksheet
4. Debt repayment calculator
5. Debt settlement calculator

Questions to Ask Before Debt Forgiveness

Is debt forgiveness the best choice or should I pay my debts in full and avoid the tax consequences?

Will added income from debt cancellation change my tax bracket and thus make me pay more in taxes?

Is unemployment compensation protected in insolvency or bankruptcy?

Other IRS Forms

As you start getting 1099 forms at the end of the tax year, keep in mind that there are many different 1099 forms.

These forms include but are not limited to:

• 1099-MISC. Earning $600 or more in rent, a prize on a game show, royalties or money from an attorney
• 1099-G. State and local tax refunds as well as unemployment compensation
• 1099-INT. Taxable interest income of $10 or more from your bank, credit union, brokerage or other financial institution

Other forms include 1098 for mortgage interest.

Common Mistakes to Avoid with 1099-C Forms

When dealing with cancelled debt and 1099-C forms, avoid these common errors:

1. Ignoring the 1099-C: The IRS already has a copy, so failing to report it will likely trigger an audit
2. Assuming all debt cancellation is taxable: Many people pay taxes on cancelled debt when they actually qualify for an exclusion
3. Not keeping proper documentation: Maintain records of all debt settlement agreements and financial status at the time of cancellation
4. Misunderstanding which year to report: The income should be reported in the year the debt was actually cancelled, not when you received the 1099-C

Filing without professional help: The rules around debt cancellation are complex and frequently changing

Pacific Debt Relief

Pacific Debt Inc is one of the leading debt settlement companies. We have consistently been named one of the best debt settlement companies in the US for years. This year, we earned two #1 rankings for our customer service. Our account managers help you understand your options and whether or not debt settlement is your best option.

If it is not, we will refer you to a trusted partner more appropriate for your situation. When you reach a debt settlement agreement, it's essential to have a written agreement in place. Learn more about drafting a proper settlement agreement with our article on  Letter for Debt Settlement Agreement.

For more information on debt settlement or if you have more than $10,000 in credit card debt that you can’t repay, contact Pacific Debt, Inc. We may be able to help you become debt free in 2 to 4 years. We have settled over $300 million in debt for our customers since 2002.

Once you’ve completed our debt settlement program, your financial situation should start to improve. You’ll be able to use money you once used for debt, and be able to use it for saving, investing, retirement, etc.

Pacific Debt, Inc is an A+ member of the Better Business Bureau. We rate very highly in Top Consumer Reviews, Top Ten Reviews, Consumers Advocate, Consumer Affairs, Trust Pilot, and US News and World Report.

Pacific Debt is currently providing debt relief coverage in the following states:
Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia, Florida, Idaho, Indiana, Kentucky, Louisiana, Massachusetts, Maryland, Michigan, Minnesota, Missouri, Mississippi, Montana, North Carolina, Nebraska, New Mexico, New York, Oklahoma, Pennsylvania, South Dakota, Texas, Utah, Virginia, Wisconsin

* Other states can be connected to one of our trusted partners

For more information, contact one of our debt specialists today. The initial consultation is free, and our debt experts will explain to you all your options.

Disclaimer: We are not qualified tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.