1099-C frequently asked questions

FAQ on 'Cancellation of Debt' tax form


If you receive a form 1099-C in the mail from a lender, your first thought is probably: "What is this and why did I get it?"


If a debt is forgiven or canceled, the IRS requires lenders to issue a 1099-C tax form to the borrower to show the amount of debt not paid. The IRS then requires the borrower to report that amount on a tax return as income, and it's often an unpleasant surprise:

Most taxpayers don't realize that canceled or forgiven debts are considered income by the IRS -- income you may have to pay taxes on. Making matters worse, many 1099-Cs contain errors, and experts say it's one of the more confusing tax forms. (See related story: 1099-C surprise: IRS tax follows canceled debt

Fortunately, we have the answers to the most frequently asked questions about the 1099-C:

Q: What is a Form 1099-C?
At its most basic level, a 1099-C reports a debt that was canceled, forgiven, never paid back or wiped out in bankruptcy. Here are some reasons you may have gotten a form 1099-C:

  • You cut a deal with your credit card issuer and it agreed to accept less than you owed.
  • A home you owned went into foreclosure and sold for less than what you owed, or you sold a home you owned in a "short sale" for less than what you owed.
  • You had a student loan or part of a student loan forgiven.
  • You haven't made a payment on a debt in the last 36 months and there has been no significant collection activity for the past 12 months. (This one is different from the others because it doesn't necessarily mean your debt is forgiven. See "Does the 1099-C form mean my debt is canceled?" below.)

The IRS requires banks and other creditors who forgive debts of $600 or more to file the forms. Why? Because the IRS says you have to pay taxes on that so-called income, unless you qualify for an exception.  

Q: Where does it tell me what debt specifically caused me to get this form?
Look for an alphabetic "identifiable event code" in Box 6 on the form, says Gary Bode, a CPA in Wilmington, North Carolina, who specializes in canceled debt. It should match up with one of the nine reasons (A-I) listed in these IRS instructions, each with a short description.

Most of the codes are pretty self-explanatory, but a tricky one is Code H, for "expiration of nonpayment testing period." That's the one creditors use if you haven't made a payment on a debt in the last three years, and they haven't made a significant effort to collect in the past year.

Q: If I got a Form 1099-C, do I have to pay taxes on that amount?
Not always. The IRS will also get a copy of the tax form so you'll have to include it on your return, but there are several exclusions and exceptions that can reduce the amount you owe or exempt you from paying taxes on it altogether. Here are the most common ones:

  • You filed for bankruptcy.
  • You had mortgage debt that was forgiven between 2007 and 2014 that was used to buy, build or renovate your primary residence. (The Mortgage Forgiveness Debt Relief Act allows up to $2 million to be excluded from your income.)
  • You had a student loan that was canceled because you agreed to work for a set time period in a certain profession -- including as a doctor or teacher assigned to a low-income area.
  • You were "insolvent" at the time the debt was canceled, which basically means you were broke. This is typically the best option for people dealing with canceled credit card debt. 

If you do qualify for an exclusion, you need to demonstrate it by filling out Form 982 and including it with your tax returns.

Q: I was struggling financially when the debt was forgiven. Does that mean I was insolvent?
The IRS requires you to total up the fair market value of everything you owned at the time and compare it to the total amount of money that you owed. (You can use the worksheet on page 8 of IRS Publication 4681, but it may best to work with a tax preparer.)

So even though the form says 'Cancellation of Debt' at the top, you may still hear from a collector. That really throws people off.

-- Jeffrey Pretsfelder
Senior tax analyst, Thomson Reuters

If you owed more money than your assets were worth, then -- congratulations! -- you were insolvent, and you can subtract the amount of insolvency from your taxable income.

Keep in mind that declaring insolvency may have future tax consequences (you may have to reduce the basis of your home or your investments when you sell them), so make sure you ask your tax adviser about that.

Q: Does the 1099-C form mean my debt is canceled and can no longer be collected upon?
Not always. It depends why you got your 1099-C. While most of the reasons listed in the "identifiable event" box really do involve canceled debt, there is some gray area.

If the bank sent you the form because you haven't made a payment on the debt in the past 36 months and it hasn't made any significant collection efforts for a year (Code H), then it may not consider the debt forgiven, says Jeffrey Pretsfelder, senior tax analyst with the tax and  accounting business of Thomson Reuters.  "So even though the form says 'Cancellation of Debt' at the top, you may still hear from a collector," Pretsfelder says. "That really throws people off." 

Sometimes when you go to the creditor, it turns out it was a mistake and they will issue an amended one.

-- Greg Fitzgerald

The issue has been argued in several courts nationwide, with taxpayers making the case that when a bank sends a 1099-C, it's an admission that the debt is no longer due. Banks counter that they are simply following IRS reporting requirements. In several cases, the judge has said a bank cannot issue a 1099-C and subsequently try to collect, says Greg Fitzgerald, an attorney in Orange, Calif., who specializes in debt. However, no court has squarely addressed the issue, Fitzgerald says.

So if you hear from a collector, don't ignore the calls just because you've received a 1099-C. 

The good news? The IRS is considering a change to its rules to clear up confusion.

Q: Why am I getting a 1099-C for old debt?
Unfortunately, creditors have a lot of wiggle room about when to report canceled income to the IRS. Statutes of limitations vary by state and by type of debt, but creditors are not required to file a 1099-C at that time since they can continue to try to collect on a debt indefinitely.

Consumer advocates argue that under IRS guidelines, creditors should send a 1099-C three years after there has been no activity on the debt, but they acknowledge the rules are unclear. And plenty of taxpayers have been getting 1099-Cs for debt that's many years -- or even decades -- old.

If this happens to you, first try calling the creditor. "Sometimes when you go to the creditor, it turns out it was a mistake and they will issue an amended one," Fitzgerald says.

If that's not the case, you will need to include the 1099-C on your tax return. A tax professional can then help you evaluate your options. You can either try to explain to the IRS why it should have been filed a long time ago and make that case as part of your tax return. Or it may be easier to simply use one of the exemptions to avoid paying on the amount.

Q: Where do I enter the information from a 1099-C on a tax form?

Unfortunately, you can't use the short forms 1040EZ or 1040A if you've received a 1099-C because they don't have a line for reporting canceled debt. On a standard 1040 individual tax return, list the 1099-C information on Line 21 under "Other Income." If you are planning to take any exclusions, you will also need to attach Form 982.

Q: What if there is a mistake on my 1099-C?
Unfortunately, mistakes are common. Often, the discharge date is wrong (some banks use a default date of 12/31 for any canceled debt from the calendar year), Bade says, and that can be important to correct if you want to claim you were insolvent at the time. If it's mortgage debt, it's not unusual for the stated value of your home to be inflated.

Start by asking the creditor for a corrected 1099-C. If your lender won't revise the form, ask your tax preparer to make an adjustment on your tax return to correct the error, Bade says. You'll need documentation, such as a letter showing the debt was discharged on a different date or a court record that shows your house sold at auction for much less than the amount listed by the bank. 

Q: What if I had a debt that was canceled or forgiven last year, but I didn't get a 1099-C?
Even though you didn't receive a 1099-C in the mail, failing to report the forgiven debt on your income tax return could result in a bill from the IRS or even an audit, says Bruce McClary, a spokesman for the National Foundation for Credit Counseling. First, try contacting the financial institution that settled the debt. If that doesn't work, you can request a wage and income transcript for the tax year in question from the IRS. You can request it online or by calling 800-908-9946.

Q: I co-signed on a forgiven loan, and we each received a 1099-C for the full amount. Do we both have to pay taxes on it?
If you're married and filing a joint return anyway, it should make no difference on your return. However, if you're married and you file separately or if you co-signed on a debt with someone who is not your spouse, it gets much more complicated, Pretsfelder says. 

In that case, state law will determine how you split the income and report it on your tax returns. Some states assign it based on how much cash from the loan you each received, Pretsfelder says. Others look only at the percent of ownership of each party, which is typically 50-50. Additional factors can also come into play, such as any interest deduction you each took from the debt or if one of you assumed responsibility for the debt in a divorce agreement. That's why, in this scenario, it's best to consult with a tax professional.

Q: What happens to a 1099-C after death?
You treat it the same way you treat other tax forms at death, experts say. If the discharge took place while the taxpayer was still alive, but if the person passed away later that year, you simply include the form when you do their last return. 

If the discharge takes place after death, then the 1099-C becomes the responsibility of the estate. "If it's very old debt, I'd recommend preparing a tax return for the person and including a letter to the IRS that says they died five years ago, there's no estate and please don't pursue this," Bade says.

  See related: 6 exceptions for paying tax on forgiven debt

Published: March 3, 2015

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