What’s a Form 1099-C and Why Was I Sent One?

If you settled a debt for less than you owed, you may owe taxes on it

By Judy Malmon, J.D. | Last updated on January 27, 2023

Use these links to jump to different sections:

For most taxpayers, figuring out our income tax is hard enough. Taxes based on money we never had? The concept is difficult to comprehend, never mind calculating the amount due each tax year. Don’t panic, this is actually a pretty common situation, albeit not intuitive. If you have a debt that you owe but enter into a settlement for less than the total amount of the debt, the difference between what you owed and what you paid is considered income to you. For example, if you had a loan for $100,000 and the lender agrees to settle the amount of debt for $75,000, the IRS looks at the $25,000 you no longer have to pay as income. As such, this amount is subject to income tax and needs to be declared in your tax return for the year you received the write-off. “The cash value of debt is hard to conceptualize, and this can lead to big problems,” says San Diego tax attorney Kevan McLaughlin. “The general rule is when you got the line of credit—loan, mortgage, whatever—there’s no tax because it carries with it the reciprocal obligation to repay it. If you don’t repay it, the government looks at that as money in your pocket, and you have to pay tax on that. So, you’re paying tax on something and you don’t have the cash. It’s taxed as ordinary income, up to the amount of the debt that was forgiven.” If you settled a debt with a lender or credit card company, they are required to notify the IRS of the debt settlement and send you an IRS Form 1099-C, Cancellation of Debt tax form . It is not a good idea to pretend you didn’t get it. There may, however, be an exception to having to pay the tax.

Exclusions & Exceptions

“If you were insolvent the moment before the debt was forgiven, it’s not taxable income,” McLaughlin add. “Insolvency is defined as your liabilities exceed your assets.” However, you would still need to account for the write-off in other ways on your balance sheet. “There’s a sequence where you have to reduce your tax attributes of other assets, although it’s not income to you. For example, if you have a $100,000 debt forgiven, if you are solvent, that’s $100,000 of ordinary income. If you have $100,000 debt forgiven and you are insolvent, it’s not income, but you have to reduce other assets by $100,000.” A debt reduction or cancellation may also be excluded from taxable income if your debt comes under one of the following:
  • Bankruptcy
  • Qualified farm indebtedness
  • Qualified real estate business debt
  • Qualified home loan that was discharged before January 1
Each of the above exclusions would require a reduction in assets, as described for insolvency. There may also be an exception to the debt cancellation that keeps it from being counted as income for tax purposes, such as:
  • Qualified student loan forgiveness programs (e.g. working in a listed profession for certain employers for a designated amount of time, or providing health services in designated locations)
  • Cancelled debt that would be tax deductible if paid
  • Reduction in the purchase price provided by the seller
  • Debt cancellation that is a gift, bequest, devise or inheritance
If you’re unsure how to account for a forgiven debt, talk to a tax preparer, or an experienced tax advisor. The best time to consult with a tax attorney is before you enter into a cancellation agreement, to see if you’ll qualify for an exclusion or exception and avoid unnecessary payments. If you want more information on this area of law, see our tax overview.

What do I do next?

Enter your location below to get connected with a qualified attorney today.
Popular attorney searches: Business/Corporate Estate Planning & Probate

Find top lawyers with confidence

The Super Lawyers patented selection process is peer influenced and research driven, selecting the top 5% of attorneys to the Super Lawyers lists each year. We know lawyers and make it easy to connect with them.

Find a lawyer near you