What’s a 1099-C and How Does it Apply to Your Debt?


When debt is forgiven, the Internal Revenue Service (IRS) taxes that forgiven debt as taxable income. This is a surprise to many until they receive Form 1099-C in the mail. This form is related to your debt-related income, such as a debt that is settled with a debt collector.

The form causes concern for many taxpayers who receive it. When the amount of debt forgiven is significant, it can also mean significant taxes. However, there is sometimes no reason for concern. Sometimes exclusions apply, which allow you to avoid paying some taxes on the canceled debt. The basics of the 1099-C form, and what exclusions apply, are described below–

The 1099-C Explained

The 1099-C is a form that reports what the IRS calls the Cancellation of Debt Income (CODI). If you have had any debt canceled, forgiven, or discharged, the IRS requires creditors to report that forgiven debt using the 1099-C form. Creditors only have to file this form when the debt forgiven is valued over $600.

The 1099-C form is more common than many people think. Some don’t even know about it until they receive one. However, the IRS states that in 2017 alone, they collected four million 1099-C forms. The estimate of the number of taxpayers who will receive 1099-C forms in 2019 is 4.5 million.

What to Do if You Get a 1099-C

Like so many other things in life, too many people think that if they ignore a 1099-C, it will just go away. However, it won’t. Ignoring a 1099-C could have serious consequences from the IRS.

When you receive a 1099-C, note that it was sent from the creditor, not the IRS. If you know you had debt forgiven over the past year and don’t receive a 1099-C from a creditor, it’s still important you report the forgiven debt on your tax return. If you don’t, it’s likely that the creditor has still reported it to the IRS, and when the IRS notices the discrepancy, they may perform an audit. This will end up costing you more than the taxes paid on the debt would have, as interest and penalty fees are also added.

1099-C Exclusions and Exceptions

Taking action after receiving a 1099-C will also make you aware of any exclusions and exceptions you are entitled to. Exceptions to cancellations of debt income are debts that have been canceled and are considered income, but that you can exclude from your taxable income. These exceptions include:

  • Amounts excluded from federal tax law including inheritances, gifts, and bequests
  • Cancellation of qualifying student loan debt
  • Programs that lower the principal on your home mortgage under the Home Affordable Modification Program

In addition to exceptions from the 1099-C, there are also exclusions. These are known as exclusions to cancellations of debt income. These differ from exceptions because you don’t have to claim them as part of your income. These debts include:

  • Debt canceled in a Chapter 11 bankruptcy
  • Debt forgiven due to insolvency
  • Qualifying farm debt
  • Cancellation of qualifying real property business debt

It’s important to understand that exclusions only apply once you have applied the exceptions.

How to Get a 1099-C Exclusion

If you qualify for a 1099-C exclusion, you must fill out Form 982. This form is called, “Reduction of Tax Attributes Due to Discharge of Indebtedness.” A debt defense attorney can help you complete the form and file it correctly. There are two main exclusions that typically apply.

The first is debt canceled in a Title 11 bankruptcy case. Before attempting to get this exclusion, however, it’s important to know whether or not the exclusion really applies. For example, if you settled a debt for less than the full amount in February and then filed for bankruptcy later that year, you are likely unable to apply the bankruptcy exclusion to your case. The chances are good that you were insolvent, or unable to pay your debt in February. While this could also be an exclusion, it is also a separate calculation.

The second most common exclusion is debt canceled due to insolvency. When you apply this exclusion, you must list your assets, their value, and the debts you owe. This includes the debts that aren’t dischargeable through bankruptcy. The exclusion applies to the extent that your liabilities exceed your assets.

For example, if you owe $45,000 and your assets are worth $35,000, you are insolvent by $10,000. If a debt collector settles the debt for $8,000, you don’t have to report that forgiven debt on your tax return. In the same situation, if the creditor forgives $14,000 of your debt, you don’t have to report the $10,000 difference on your tax return. You do, though, have to report the $4,000 that exceeds the difference between your debt and your assets.

What to Do if You’ve Paid Taxes on Excluded Debt

Many taxpayers don’t understand 1099-C forms, the exclusions, and the exceptions. For this reason, many people pay taxes on debt that should have rightfully been excluded. They may think there is no way to reclaim those funds, but there is.

If you’ve paid taxes on forgiven debt that you shouldn’t have, you can go back into your past tax returns for the past three years and make adjustments to them. To do this you’ll need Form 1040X. Adjustments to your tax returns are not eligible for e-filing, as the original was. You’ll need to mail this form directly to the IRS. You must also explain why you are refiling.

Contact a Florida Debt Defense Lawyer Who Can Help

If you’ve had debt forgiven and are now worried about paying taxes on it, you may have options. While filing a form 1099-C and the other forms you may need is intimidating, a Fort Lauderdale debt defense attorney can help.

At Loan Lawyers, we are passionate about defending people against debt. We know how financial hardships impact your life, and we can help you discharge as much debt as possible, or defend against a judgment that’s been issued against you. We’ll also advise on the number of ways your debt will impact you legally, whether it’s been forgiven or not. If you’re struggling with debt, contact us today at (954) 523-HELP (4357) for your free case review to learn more.

Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 2,000 homes from foreclosure, eliminated more than $100,000,000 in mortgage principal and consumer debt, and have recovered over $10,000,000 on behalf of our clients due to bank, loan servicer, and debt collector violations. Contact us for a free consultation and find out more about our money back guarantee on credit card debt buyer lawsuits, and how we may be able to help you.