Overview

When a creditor cancels or abandons collection of a debt, the IRS treats the canceled amount as income in many cases. Lenders use Form 1099‑C, Cancellation of Debt, to report canceled debt of $600 or more to both the IRS and the borrower. Receiving a 1099‑C can materially change your annual taxable income and your tax return for the year the debt was canceled (see IRS: About Form 1099‑C) [https://www.irs.gov/forms-pubs/about-form-1099-c].

This article explains the common triggers for a 1099‑C, who issues it, important exceptions (insolvency, bankruptcy, statutory exclusions), what to check if you receive one, and practical steps to respond. It also covers timing and common misunderstandings that lead to costly mistakes.

Sources and legal references in the body point to the IRS and government resources; this is educational content and not individualized tax advice. Consult a tax professional for your situation.

Who must file a 1099‑C and when?

  • Trigger: A creditor generally must file Form 1099‑C when a debt of $600 or more is canceled, forgiven, or discharged. The IRS instructions for Form 1099‑C explain reporting requirements and filing deadlines (creditors must furnish the form to the debtor and file with the IRS—check the current year’s form instructions for exact dates) [IRS About Form 1099‑C].
  • Typical timing: Lenders usually send the 1099‑C early in the calendar year after the cancellation (the form instructions list deadlines to furnish to the borrower and file with the IRS).

Note: The $600 threshold applies to reporting—creditors may still report smaller amounts under certain circumstances, but the 1099‑C is commonly associated with the $600 minimum.

Common events that trigger a 1099‑C

  1. Charge‑off then cancellation: When a creditor charges a debt off their books and later decides to cancel it as uncollectible, they may file a 1099‑C.
  2. Settlement for less than full balance: If you settle a debt for less than the full balance, the canceled portion (the difference between the original debt and the amount you paid) may be taxable and trigger a 1099‑C if $600 or more.
  3. Lender‑initiated forgiveness: A lender that forgives a loan for reasons such as hardship or as part of an agreement may issue a 1099‑C.
  4. Foreclosure or repossession: When property securing a loan is repossessed or foreclosed and the lender cancels the remaining deficiency, a 1099‑C may be issued for that canceled balance.

Important distinction: A creditor “charging off” a debt on its books is an accounting step and does not automatically mean the debt is canceled for tax purposes. Only when the creditor legally discharges the debt or decides to treat it as canceled will it typically issue a 1099‑C.

When canceled debt is NOT taxable (key exceptions)

The tax code and IRS guidance identify several important exclusions. If you qualify, you’ll generally use IRS Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) to report the exclusion. See IRS: About Form 982 [https://www.irs.gov/forms-pubs/about-form-982].

  1. Bankruptcy discharge
  • Debts discharged under Title 11 of the U.S. Bankruptcy Code are not taxable. If your debt is discharged in bankruptcy, the cancelled amount is excluded and you do not include it as income. However, you may still receive a 1099‑C in error—if so, you must keep documentation and attach Form 982 and supporting documents to your return.
  1. Insolvency
  • Insolvency exclusion applies when, immediately before the discharge, your total liabilities exceeded the fair market value of your assets. You may exclude some or all of the canceled debt to the extent you were insolvent. The IRS provides an insolvency worksheet in the Form 982 instructions to calculate the excludable amount.
  • Example: If liabilities = $80,000 and assets = $50,000 immediately before discharge, insolvency amount = $30,000. If $40,000 of debt is canceled, up to $30,000 may be excluded under insolvency rules.
  1. Qualified farm indebtedness and qualified real property business indebtedness
  • Special rules may allow exclusion for certain farm debts and business real property debts. Form 982 instructions explain the qualifications and tax consequences.
  1. Statutory or program‑specific exclusions
  • Some government loan forgiveness programs include explicit statutory tax exclusions. For example, certain types of mortgage forgiveness were excluded under the Mortgage Forgiveness Debt Relief Act when it applied, and certain student loan discharges may be excluded by statute or administrative rule. Laws change—always check current IRS guidance for the specific program.

State tax treatment: Even if a canceled debt is excluded federally, some states may tax the forgiven amount. Check your state tax agency or a tax professional.

How to respond if you receive a 1099‑C

  1. Verify the form for accuracy
  • Check the amount reported, the debt description, and your identifying information. Creditors occasionally issue 1099‑Cs in error (e.g., wrong debtor, wrong amount, or debt not actually canceled).
  • Keep documentation showing payments, settlement agreements, foreclosure filings, or bankruptcy orders.
  1. If it’s incorrect, contact the creditor immediately
  • Request a corrected 1099‑C. Keep written records of communications. If the creditor won’t correct it, keep correspondence and be prepared to attach explanations and supporting documents to your return.
  1. Determine if you qualify for an exclusion
  • Use Form 982 and the insolvency worksheet if you think insolvency applies or if debt was discharged in bankruptcy. If your exclusion applies, you’ll attach Form 982 to your return and follow its instructions.
  1. Report the income if no exclusion applies
  • Include the canceled amount reported on Form 1099‑C as ordinary income where instructed on Form 1040. If it’s business debt, it may be reported differently (e.g., reduce tax attributes or adjust business income) — consult Form 982 instructions and a tax advisor.
  1. Consider professional help
  • A CPA or tax attorney can help: (a) determine correct tax handling, (b) prepare Form 982 or other filings, and (c) represent you if you need to dispute a creditor or respond to IRS notices.

Examples (common scenarios)

  • Personal credit card debt: You settle for $4,000 on a $10,000 balance. The creditor may send a 1099‑C for $6,000 (the canceled amount) if $600+; that $6,000 is taxable unless you can claim an exclusion.

  • Mortgage foreclosure with deficiency: If a house sells and a $20,000 deficiency is canceled, expect a 1099‑C for the canceled deficiency unless the Mortgage Forgiveness rules or other exclusions apply.

  • Bankruptcy: Debts discharged in bankruptcy are not taxable, but you should still attach Form 982 to your return and retain the bankruptcy discharge order as evidence.

Common misconceptions and pitfalls

  • “Charged off” ≠ automatically canceled for tax purposes. Creditors sometimes charge off accounts but still attempt collection; they may later issue a 1099‑C only when they legally cancel the debt.
  • Ignore the 1099‑C at your peril. If you don’t report it and the IRS has a copy, you’ll likely get a notice and potential penalties.
  • “All forgiven debt is taxable.” Not true—bankruptcy, insolvency, and specific statutory exclusions can eliminate the tax.

Practical checklist for taxpayers

  • Don’t ignore the form. Verify accuracy and keep it with your tax records.
  • Gather supporting documents: settlement agreements, foreclosure sale records, payment histories, bankruptcy discharge copy.
  • Use the insolvency worksheet in Form 982 instructions to see if you qualify for an exclusion.
  • File Form 982 if claiming an exclusion and attach supporting documentation as required.
  • Check state tax rules.
  • If the creditor refuses to correct a mistake, file your federal return correctly, attach explanations and supporting documentation, and be ready to respond to IRS notices.

When to get professional help

If the canceled amount is large or your eligibility for an exclusion is uncertain, consult a CPA or tax attorney. In my 15+ years advising clients, incorrect handling of cancellation income commonly triggers IRS notices and unexpected tax liabilities that are avoidable with timely documentation and the correct use of Form 982.

Quick reference links (authoritative)

Professional disclaimer: This content is educational and reflects commonly applicable federal tax rules as of 2025. It is not personalized tax advice. Tax law and program eligibility change; consult a qualified tax professional or the IRS for guidance tailored to your situation.