Just because you got a 1099-C form from forgiven debt is not a reason to immediately panic and think you will automatically owe a lot of taxes on the forgiven debt.
In the debt world, a point of contention is the chronic misinformation about forgiven debt from debt settlement or a debt determined to be uncollectible.
You will often see this misinformation used by credit counselors as a way to scare people into enrolling in their program.
A forgiven debt of $600 or more will indeed generate a 1099-C. This is a form reported to both the Internal Revenue Service (IRS) and the consumer.
The instructions on the 1099-C form say:
“You received this form because a Federal Government agency or an applicable financial entity (a lender) has discharged (canceled or forgiven) a debt you owed, or because an identifiable event has occurred that either is or is deemed to be a discharge of a debt of $600 or more. If a creditor has discharged a debt you owed, you are required to include the discharged amount in your income, even if it is less than $600, on the “Other income” line of your Form 1040. However, you may not have to include all of the canceled debt in your income. There are exceptions and exclusions, such as bankruptcy and insolvency.”
If you received a 1099-C many years after a debt became uncollectible, you need to know about little known IRS Form 4598.
But that’s where may run of the rails with their message all income is taxable if it is forgiven. They miss the point “There are exceptions and exclusions, such as bankruptcy and insolvency.”
In fact, there is a code for the 1099-C that appears to be tailor-made for debt settlement reporting:
Code F — By agreement.
“Code F is used to identify cancellation of debt as a result of an agreement between the creditor and the debtor to cancel the debt at less than full consideration.” – Source
And this one is used when a debt becomes uncollectible:
Code G — Decision or policy to discontinue collection.
“Code G is used to identify cancellation of debt because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. For purposes of this identifiable event, a defined policy includes both a written policy and the creditor’s established business practice.”
[For more codes, see this post.]
If you have forgiven debt, IRS Form 982 will be your best friend.
There is no tax liability for all of the forgiven debt for those that eliminate their debt in bankruptcy. It’s just a simple checkbox on IRS Form 982. See Part I, line 1a.
For those that have forgiven debt from debt settlement, then you need to check 1b.
The forgiven debt is taxable above the amount where you become solvent. Here is what the IRS says:
Check the box on line 1b if the discharge of indebtedness occurred while you were insolvent.
You were insolvent to the extent that your liabilities exceeded the fair market value (FMV) of your assets immediately before the discharge. For details and a worksheet to help calculate insolvency, see Pub. 4681.
Example. You were released from your obligation to pay your credit card debt for $5,000. The FMV of your total assets immediately before the discharge was $7,000 and your liabilities were $10,000. You were insolvent to the extent of $3,000 ($10,000 of total liabilities minus $7,000 of total assets). Check the box on line 1b and include $3,000 on line 2.
The IRS even provides a worksheet to help figure out if you are insolvent.
In most cases I’ve seen, the majority of people with a 1099-C were insolvent or mostly insolvent when their debt was forgiven. They have plenty of other obligations that weigh them down.
By filling out IRS Form 982, you can avoid any income tax due on the forgiven debt.
And as the example above shows, they only have to pay income on the forgiven debt above the point they become solvent, meaning their assets are more than their liabilities.
For specific tax advice about how all of this applies to your situation, see a qualified tax adviser.
ORIG: 20130519
So I was in a debt program and the I recieved 1099 c for the debt that wasn’t paid through negotiation do I have to claim as income on taxes or is there a way out because I was told I had to and now I owe so much money…thanks
You should still receive a 1099 even if you settle the debt. The 1099-C is for the part of the debt that was canceled. That’s what the C stands for. The only way out is to use the 982 to see if you qualify for the elimination of the tax liability.
If the debt was discharged due to Chap. 11. Is checking 1a complete the form?
I’m still a bit unclear regarding the 1099-C regarding what’s considered an asset. Will you have to include your pension/retirement account as assets? Any money you managed to save that is in your savings at the bank? Do those count as assets to. If you’re still working and aren’t drawing retirement why does the IRS consider that an asset?
Also, Part II and II seems very confusing in Form 982. I’m looking at it and wouldn’t even know how to answer the questions or what to put down. And by the way this would be for discharge of indebtness (credit cards).
Great website you have going here with lots of good info. Thank you!
IF the primary borrower of a student loan of which I was the co signer, defaulted. I gave her the settlement money. Now the IRS wants me to declare the difference as income? Any wiggle room there?
Forgiven debt is a taxable event. However, if you were the cosigner and did not receive any money from the loan or benefit from it. It is unclear if you received a 1099-C or a notice from the IRS. If this was a 1099-C issued by the lender they often do send one to both parties even though they are not required to do that. The IRS says, “Guarantor or surety. You are not required to file Form 1099-C for a guarantor or surety. A guarantor is not a debtor for purposes of filing Form 1099-C even if demand for payment is made to the guarantor.”
You will either need to ask the lender to submit a corrected 1099-C to the IRS or ask a local tax professional for help in properly dealing with this when you file and the IRS may contact you asking you why you did not pay tax on the forgiven amount.
Bottom line – It can be dealt with. It’s a pain in the ass to deal with it.
when is the debt considered forgiven? i had a foreclosure 8 years ago when the market tanked and i was told they had 5 years to file judgement for deficiency and this year i got a 1099-c. is it forgiven in 2010 or this year? i have made alot more since then
Here is what the IRS has to say about when the 1099-C should be issued:
A debt is deemed canceled on the date an identifiable event occurs or, if earlier, the date of the actual discharge if you choose to file Form 1099-C for the year of cancellation. An identifiable event is one of the following.
A discharge in bankruptcy under Title 11 of the U.S. Code. For information on certain discharges in bankruptcy not required to be reported, see Exceptions,later. Enter “A” in box 6 to report this identifiable event.
A cancellation or extinguishment making the debt unenforceable in a receivership, foreclosure, or similar federal nonbankruptcy or state court proceeding. Enter “B” in box 6 to report this identifiable event.
A cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. Expiration of the statute of limitations is an identifiable event only when a debtor’s affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired. Enter “C” in box 6 to report this identifiable event.
A cancellation or extinguishment when the creditor elects foreclosure remedies that by law extinguish or bar the creditor’s right to collect the debt. This event applies to a mortgage lender or holder who is barred by local law from pursuing debt collection after a “power of sale” in the mortgage or deed of trust is exercised. Enter “D” in box 6 to report this identifiable event.
A cancellation or extinguishment making the debt unenforceable under a probate or similar proceeding. Enter “E” in box 6 to report this identifiable event.
A discharge of indebtedness under an agreement between the creditor and the debtor to cancel the debt at less than full consideration (for example, short sales). Enter “F” in box 6 to report this identifiable event.
A discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt.
A creditor’s defined policy can be in writing or an established business practice of the creditor. A creditor’s established practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy. Enter “G” in box 6 to report this identifiable event.
Other actual discharge before identifiable event. Enter “H” in box 6 if there is an other actual discharge before one of the identifiable events listed above.
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However, you should absolutely talk to a knowledgeable tax professional since the Mortgage Forgiveness Debt Relief Act of 2007 may cover this situation and would exclude income from the discharge of debt on their principal residence between 2007 and 2016.