Why Did I Receive a 1099-C from my Creditor?

Posted on Friday, March 4th, 2011  

IRS regulations require creditors to issue Form 1099-C to report to the IRS cancellation of indebtedness, which is counted as income for tax purposes. The purpose behind the regulations is to stop potential fraud. In general, loans are not considered income and are not taxable as you are required to repay the amount borrowed. However, if you borrow money and then do not pay it back, the amount not paid-back becomes income for tax purposes.

The regulations provide for certain exceptions to the requirement to count as income the forgiveness or cancellation of a debt. For individuals in distressed financial circumstances, the most significant are:

  • Discharge of indebtedness in a title 11 case – debts that are discharged in bankruptcy are not treated as income for tax purposes
  • Discharge of indebtedness to the extent insolvent (not in a title 11 case) – debts that are cancelled while an individual is insolvent are not treated as income for tax purposes to the extent of the individual’s insolvency.
  • Discharge of qualified principal residence indebtedness – debts that are incurred through the cancellation of mortgages/loans that were incurred to purchase, construct or improve an individual’s primary residence are not treated as income for tax purposes. This exception applies to debts cancelled through the end of 2012.

When reviewing your options for reducing/eliminating your unsecured debt, you need to consider the tax implications of all options. If you choose to settle your debts for less than is owed, you could have a future tax burden. Additionally, if you settle some of your debts and then file bankruptcy, those debts that were previously settled would not fall into the first exception, as they were not discharged in bankruptcy. Before deciding on a course of action for reducing or eliminating debt, you should consult with a bankruptcy attorney to discuss the implications of each option.

  • FREE Consultation

    Your Name (required)

    Your Email (required)

    Your Phone (required)

    Your Message

  • Recent Posts