Rachel Hunter, J.D. | Article

Cancellation of Debts & 1099C Forms


I have many clients who receive 1099c forms from creditors and have questions about how these should be handled. A 1099c is a cancellation of debt form. If you owe money to a creditor and that creditor gives up the right to collect on the debt, any amount that is “forgiven” by the creditor which is over $600 must be reported to the IRS as income to you. It is then taxed as if you received this amount in income unless the forgiven amount is subject to an exclusion. To meet the exclusion on form 982, most of my clients fall within the insolvency non-bankruptcy exclusion and I will focus on that exclusion. However, there are other grounds for exclusion, such as bankruptcy, mortgage debt on a primary residence, farm or business property and you should consult with a tax preparer if you fall within one of these grounds.

Under the insolvency exclusion, if your total debts outweigh your total assets by the forgiven amount, you can exclude all or some of the forgiven debt. Some examples:

Example 1: You have $100,000 in total assets and $150,000 in total debts. You receive a 1099c on a credit card and $10,000 is reported thereon. Since your debts outweigh your assets by more than $10,000, you can exclude all of the 1099c income.

Example 2: You have $100,000 in total assets and $115,000 in total debts. You receive a 1099c on a credit card and $10,000 is reported thereon. Because your debts only outweigh your assets by $5,000, you can only exclude $5,000 of the reported 1099c income.

Example 3: You have $150,000 in total assets and only $100,000 in total debts. You receive a 1099c on a credit card and $10,000 is reported thereon. Since your assets outweigh your debts, you cannot exclude any portion of the $10,000 and must pay tax on the entire sum.

The forms and publications are available free of charge at the IRS website: http://www.irs.gov/

To assist you, here are the links to the relevant forms, publications and tax topics concerning cancelled debts:


These materials include detailed instructions and worksheets. You may need the help of an experienced CPA to figure out if you meet the test for insolvency. Some tax preparers have never heard of Form 982. If your preparer is one of these, find another preparer who is familiar with the form.

Some other issues with 1099c’s. Just because the creditor has issued the 1099c form, it does not mean that you don’t owe the debt. You may still have a moral and/or legal duty to pay your debts. It also does not mean that a creditor cannot sell the debt to a junk debt buyer who then tries to collect on the debt from you.

If you do receive a 1099 form and then later settle the debt, try to get the creditor/junk debtor to issue an amended form. If the creditor refuses, you may be able to explain what happened to the IRS. Again, talk to your tax preparer about the best way to handle this. If you receive a form and resolve the debt in the following tax year, again, get the creditor to issue an amended 1099c. You will also need to file an amended tax return for the prior year.

Some creditors do not issue 1099c’s, regardless of whether you have settled or not settled debts. If you do not receive one, then that means the creditor has, for whatever reason, not forgiven the debt or the balance on the debt and you should not have to report this on your 1040 form. However, talk to your tax preparer about this.

Copyright (c) 2012 by Rachel Lea Hunter

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