Debt and Income Taxes

Have you been having trouble paying your debts? Have you settled any of your debts for less than what was owed? or maybe you’ve given up on paying some of your debts. You might be in for a nasty surprise this tax season: Form 1099-C.

Form 1099-C or “Cancellation of Debt” is sent to individuals who were insolvent and had all of their debts (or even a portion) of their debts written off or cancelled by their creditor. It’s a creditor’s final slap in the face. The IRS may require you to report as income any amounts reported on Form 1099-C even though you didn’t receive any money. For the IRS a cancellation of a debt is considered a personal net gain and as such considerable taxable.

So what do you do if you get this form in the mail? Well, you must report the amount on Box 2 as income on your tax return. Unless any of the following situations apply to you:

  1. Bankruptcy