Cancellation of Debt: Questions & Answers on 1099-C

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It’s no secret that millions of Americans are in debt. If you borrow money from a lender and sign the dotted line on a legal document obliging you to pay it back, you have debt. The total amount of credit card debt alone is about $764 billion, while student loans have reached a total of $1.34 trillion.

If you’re burdened under a pile of debt, whether it be from car loans, mortgages, credit cards, or student loans, there are many just like you trying to reach financial freedom. Thousands who face debt may find it difficult to make ends meet, but our tax professionals at Community Tax have worked with many to help ease their debt concerns.

Debt among Americans is growing for several reasons. Unlike the generations before us, the cost of living is increasing at a staggering rate faster than the growth of the median income. Medical, housing, and education costs are just a few of the expenses that take a big bite out of our bank accounts.

For many, it becomes difficult to make it through without relying on more credit, which leads them to consider a Cancellation of Debt in order to relieve their existing financial obligations. What is a Cancellation of Debt? Keep reading to learn more or use the jump links below to navigate to your question at hand.

Blue and green chart of the US National Debt from 1965 to 2014

What is a Cancellation of Debt?

Also known as COD, a Cancellation of Debt is the result of a creditor discharging or forgiving debt for less than the full amount owed. The amount the debtor is no longer required to pay is considered “canceled” in the eyes of the law, but that doesn’t necessarily mean the once-owed money simply disappears from the record.

For some people, their debt is so large compared to their income that they can’t pay it off without undergoing extreme financial hardship. In this case, it may be in the borrower’s interest to negotiate a debt cancellation with their lender—but this doesn’t come without a tax bill.

There are consequences that can arise from a Cancellation of Debt, as well as reasons for why one might pursue this form of financial relief. Namely, if your lender agrees to your debt cancellation, then you will likely have to report the canceled debt amount in your income for tax purposes, depending on your circumstances.

Reporting Cancellation of Debt

According to, if you have canceled, forgiven, or discharged debt for less than the amount you pay, the amount of the canceled debt must be reported as taxable income (unless you qualify for a special exception). This is because when you took out the private loan, you didn’t have to include the loan proceeds in your income since your responsibility was imposed on the lender.

Most taxpayers report income to the IRS on their individual income tax returns using Form W-2 provided by their employers. However, the government relies on certain information returns—known as Form 1099s—to record taxable money given or paid to you by an entity other than your employer.

There are different kinds of 1099s depending on what type of income or debt is being addressed for taxation:

  • The 1099-B is for broker transactions and barter exchanges
  • The 1099-DIV is for dividends
  • The 1099-S is for real estate transactions
  • The 1099-G is for state and local tax refunds and unemployment benefits
  • The 1099-INT is for interest
  • The 1099-Ris for pensions and payouts from retirement accounts
  • The 1099-MISC is for miscellaneous information

But it’s the Form 1099-C, Cancellation of Debt, that plagues people the most.

When your lender forgives debt responsibility, you’re then obliged to pay back the loan proceeds they were formally responsible for. Your lender will usually report the amount of your remaining canceled debt to both you and the IRS on Form 1099-C.

It may seem like a vicious cycle, and it certainly can be. Without the expert advice of financial advisors and tax professionals, getting out of debt and reaching financial freedom may feel like an impossible task. This is how many people get their debt canceled.

What is Form 1099-C, Cancellation of Debt?

If a debt is canceled, your lender is supposed to send you and the IRS a Form 1099-C. This form will provide information regarding your debt, including the total amount lent to you, how much you paid, and other details about your loan.

It can be applied to debt that was wiped out in almost any circumstance, but most often with loans. If you own property subject to a debt, then you may undergo foreclosure, repossession, a voluntary transfer of the property to the lender, abandonment, or a mortgage modification.

What should I do with a Form 1099-C, Cancellation of Debt?

You need to report the canceled debt on Form 1099-C for the year in which the cancellation is set into place. The only time this tax doesn’t apply is if the law specifically states that it allows you to exclude the debt from your gross income (discussed in more detail below).

Note: Sometimes you won’t receive a Form 1099-C, Cancellation of Debt, from your creditor. In this case, you can request another document, but always be sure to keep your own personal records for safekeeping.

Don’t assume that just because you didn’t receive a 1099-C, you’re in the clear. Whether or not you receive a 1099 document, count on the IRS to have their own copy.  The usual deadline for mailing 1099s to taxpayers is January 31, the last day of the taxable year, but the taxpayer has until the end of February to send all its 1099s to the IRS.

Some lenders and creditors will send 1099s both to the taxpayer and IRS at the same time. However, many will mail taxpayers their copy by the last day of the tax year and wait several weeks to transmit copies to the IRS. Sometimes creditors fail to send out their 1099s until after tax season, and in this case, you won’t be penalized.

If this happens, the IRS will usually not require you to amend your tax return as long as you reported your Cancellation of Debt on your own. Therefore, you should always report it to the IRS during tax season, unless yours is classified as  “nontaxable”.

Not sure if you need to report your canceled debt?

How does the IRS classify canceled debt?

Unfortunately, you’re not in the clear just because your creditor cancels your debt. When your debt is canceled, the IRS sees the leftover amount as income you didn’t return. Why? Because you’ve already spent it, whether it be for a car, a home, or your education.

Initially, you don’t pay taxes on the loan you receive because you’re under a contractual agreement to repay it to your lender. When the debt is canceled—that is, you’re free of your contract—you’ve essentially earned income for free. Just like your regular income, this income too gets taxed.

What if my debt is canceled by a private lender?

When it comes to debt, figuring out what is and what isn’t taxable can be confusing. If a friend or family member loans you’re a few thousand dollars to help pay the rent, it doesn’t count as taxable income. Bank loans also are not considered taxable income. But what is taxable debt, then? Loans that are forgiven, also known as the “canceled debt” we discuss here.

Private loans generally aren’t taxable so long as it’s a loan under contract to be paid off—unless the loan didn’t charge enough interest. In this case, the IRS can impose an Applicable Federal Rate for any personal loan. In the event of cancellation, it’s considered taxable income.

Are there exceptions to the Cancellation of Debt income?

Yes, there are some exceptions that don’t count as taxable income, even though they’re technically part of the Cancellation of Debt. If you’re wondering whether your canceled debt is nontaxable, contact your creditor or read the terms of your loan.

Blue and yellow table with the text "Exceptions to Cancellation of Debt Income Table".

An example of this would be student loans. Certain types of student loans have provisions that allow your debt to be forgiven after a certain period based on some sort of service. These loans usually stipulate that you work a government or public service position (like teaching) for a period of three to ten years. After that time period, all remaining debt is forgiven, tax-free.

If you are like many college graduates who suffer from debt, you should consider looking into the stipulations of your student loans and how you might find opportunities to alleviate your financial burden.

Any endowments, real estate that was given to you by means of a will, personal gifts, or other forms of inheritance are also a general exception to the rule. However, these items aren’t exempt from other forms of taxation. Bequests that are inherited from another may still be subject to an estate and/or capital gains tax. States differ on the taxes they require from inheritances, so let a financial advisor help you through it.

Some debt expenses are also tax-deductible. Personal loans aren’t tax-deductible, but other loans may be. Any interest paid on student loans, business loans, and mortgages are deductible and will not be taxed through debt cancellation. Keep in mind that there are certain prerequisites that may determine your eligibility. For example, mortgage interest is only deductible if the loan went to a primary or secondary residence.

Finally, any Pay-for-Performance Success Payments under the Home Affordable Modification Program that decreases the principal balance of your home mortgage is excluded as well, because this ruling was meant to reward those who make housing payments on time.

If you’re wondering whether your canceled debt is taxable, contact your creditor or research the terms of your loan to know more. When in doubt, contact Community Tax and we’ll pair you with one of our tax professionals to deduct what you can from your debt cancellation income tax.

What is excluded from gross income?

Blue and yellow table with the text "Exclusions from Gross Income Table".

Some portions of your canceled debt may not be considered part of your gross income. Unlike debt exceptions, these provisions don’t count as part of your canceled debt at all. You must reduce certain tax attributes if you exclude canceled debt from income under one of the exclusions below.

These attributes include the basis of assets, some credits and carryovers, and losses so long as none of them are below zero. In this case, you must attach your tax return to a Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness.

Gross income exclusions include debt canceled in a Title 11 bankruptcy case, cancellations during insolvency, cancellation of farm indebtedness, real property business indebtedness, or qualified principal residence indebtedness.

Note that state laws don’t always align with federal laws regarding gross income exclusions. Get professional advice from a tax expert at Community Tax for the best advice on what you can deduct from your taxes.

Is there an exception for a mortgage?

When it comes to mortgages, the answer is “it depends.” Mortgages taken out within certain years are subject to what’s called the Mortgage Debt Relief Act of 2007. This Act has helped thousands of people avoid a big bite out of their taxes from the IRS.

After the housing market crash, the IRS recognized that it would be impossible to tax many people based on canceled mortgages without putting them in dire financial circumstances. The Mortgage Debt Relief Act helped relieve partial debt gained through mortgage restructuring and foreclosure. During the duration of this measure, refinancing was allowed up to the amount of principal balance of the original mortgage.

The Act covered debt forgiven within the calendar years of 2007 to 2016. That means debts that were canceled in 2017 fall under the Mortgage Debt Relief Act if it was signed into agreement in 2016.

If your mortgage doesn’t fall between the calendar years of 2007 to 2016, there are still other ways around getting taxed for your canceled debt. The canceled debt isn’t considered income if you received it due to filing a bankruptcy, or if you’re insolvent.

Insolvency refers to a situation in which the amount of your debt exceeds the value of your assets. In this case, you can exclude canceled debt from income up to the amount that you’re insolvent. For example, if your assets amount to $40,000 and your debt is $50,000, you are insolvent by the amount of $20,000.

At Community Tax, we understand that our clients who cancel their mortgage need financial assistance. Let us sort through the busy work and try to keep you free of taxable income based on your canceled debt.

Are bankruptcy discharges taxable?

A debt that is discharged due to bankruptcy has no income tax consequences to an individual because it’s excluded from the taxpayer’s gross income. But you may be wondering, “Why did I still receive a Form 1099-C from the IRS?”

Sometimes this does happen, and if it does, all you need to do is file an IRS Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) along with your next tax return.

Remember that bankruptcy can only discharge a debt, not income. When a lender sends you a Form 1099-C before you file for bankruptcy, your debt can’t be discharged. In the event that this happens, your debt becomes taxable income. As mentioned earlier, if you’re insolvent when your debt is canceled, your debt may not be taxable.

What if I don’t agree with the information on the Form 1099-C, Cancellation of Debt?

Mistakes can be made, and even the IRS isn’t perfect. You, your creditor, and the IRS can make a minor mistake that can cause debt frustration. When you file or receive a Form 1099-C, you have the option to include the amount in your income or refute to the IRS why the amount should be partially or entirely excluded.

You should contact the issuer as soon as you receive a 1099-C form you disagree with. Some people receive them from banks they don’t have accounts with, and others get them even when they didn’t want their debt canceled.

Ask the issuer to justify why they issued the 1099-C or send them a corrected form with a zero in all appropriate sections. Document every part of the process, including copies of your documents, dates, times, and names of those you’ve interacted with.

When taxpayers have a discrepancy with a 1099-C, it can make filing taxes seriously challenging. Sometimes, creditors are difficult to contact or get explanations from. In this case, reach out to a tax professional to help you resolve the issue.

Did you receive Form 1099-C?

Not sure what to do next?



How Community Tax Can Help

Still have questions? Community Tax will help answer any question you may have. When tax issues arise, going it alone may not be the wisest choice. Choose us and we’ll designate a tax expert to help you resolve any discrepancy you may have with the IRS or your creditor.

If you do have taxable income from your canceled debt and you need help developing a strategy to pay it off, we are more than happy to help. We’ll organize your financial information, look for any possible exceptions or non-taxable exclusions, and make sure that you don’t get penalized just because your loan was canceled.

Don’t leave an issue like loan cancellation go unchecked—you could be losing thousands of dollars by not knowing the ins and outs of the process. Our dedicated team of enrolled agents and certified public accountants have years of combined experience helping our clients file their returns and maintain their finances to stay secure and reach their goals.

At Community Tax, we have a passion for helping our clients through a variety of tax-related services. Reach out to us and we’ll help you through any tax situation, whether it be for a simple filing, a garnishment, a levy, a Cancellation of Debt issue, or something else.

Community Tax is made up of a team of experts with decades of combined experience helping clients grow into financially independent individuals. We want our clients to reach success and take control of their financial future. If this sounds like you, reach out to us today and we’ll consult with you to determine how to best handle your income tax due to Form 1099-C, Cancellation of Debt.