A 1099-C does not wipe out unpaid debt from credit reports

To Her Credit with Sally Herigstad

Sally Herigstad is a certified public accountant and the author of “Help! I Can't Pay My Bills: Surviving a Financial Crisis.” She writes “To Her Credit,” a weekly reader Q&A column about issues involving women and credit, for CreditCards.com. She also has written for MSN Money and Bankrate.com, and has guested on Martha Stewart Radio and other programs.

Ask Sally a question, or see if your question has already been answered in the To Her Credit answer archive.

I claimed unpaid card debt as income on my tax return from a 1099-C, but it's still showing up on my credit reports as unpaid and preventing me from qualifying from a mortgage. Shouldn't the debt have been removed?

The Internal Revenue Service does not say that your debt balance is zero after a Form 1099-C is issued, or even that the bank cannot try to collect after the notice is sent.
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Dear To Her Credit,
I received a Form 1099-C Cancellation of Debt in 2016 for credit card debt that I was unable to pay. I claimed the amount of canceled debt on my taxes as income, but my tax liability as a result was negligible because I was insolvent.

I now want to buy a house and my mortgage guy is saying the mortgage companies are considering a large portion of this debt as a monthly obligation. Why would that be and what should I do? My mortgage guy wants me to approach the credit card company and see if I can get a letter showing a zero balance on my account, which he will take to the credit bureaus to see if it can be removed from my credit report.

Dear Erin,
The real question here is whether your credit card balances are actually zero, based on the fact that you received 1099-C forms for them and claimed the canceled amounts as taxable income. That’s not an easy question to answer.

The Internal Revenue Service does not say that your debt balance is zero after a Form 1099-C is issued, or even that the bank cannot try to collect after the notice is sent. A Form 1099-C is an informational form sent by the creditor to the IRS, with a copy sent to you. It means that your debt meets certain qualifications; for example, that it is considered uncollectible. It does not qualify as a contract or settlement between you and your creditor.

If you browse the Internet, you’ll find many people adamantly insisting that you can’t be forced to pay tax on “income” from canceled debt, and at the same time still show the debt as a balance on your credit report and still face possible collection attempts for the debt. Others disagree, and court cases have come down on both sides of the issue.

IRS Form 1099-C could be better named, in my opinion. “Canceled Debt” sounds like the debt should be gone. “Deemed Uncollectible Debt” might be a more accurate description, although more unwieldy. For now, however, we’re stuck with this somewhat misleading form name.

You have options

Your situation is one example of why it is important to always resolve debt, rather than just let it slide. If a person is having trouble paying a debt, she should try to settle it, find another source of money such as a loan or work out a payment plan with the bank. Even bankruptcy, which I only recommend as a very last resort, resolves a person’s debts instead of leaving them hanging. Getting a Form 1099-C is not a substitute for decisively resolving a debt.

At this point, you can contact your bank and try to get them to report the balance as zero. Be forewarned, however, that some banks have refused to do so. Their position is that the balance was not paid or settled, which unfortunately is true.

If the banks won’t report the amounts due as zero, you can still resolve your debts the same way you would have before you received the Form 1099-C. Since the tax impact was minimal the year you reported the forgiven amount as income, you shouldn't need to amend that year's tax return. If you are in better financial shape now, you could pay the debts off, or settle for a lesser amount. If you can’t or don’t choose to do that, you can add a letter of explanation with your mortgage application. Some mortgage companies are more willing to work with people on an individual basis than others. If one turns you down because you have these unresolved balances on your credit report, another one may not.

I wish I had better news for you about your “canceled” debts and your credit report. The important thing now is to keep moving forward by improving your financial situation and paying your bills faithfully. The negative marks from these old debts will become less and less important, and eventually they will fall off your credit history completely and be forgotten.

See related: 1099-C frequently asked questions, 1099-C rule change is good news for debtors


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Updated: 06-17-2018