BACK

Expert Q&A

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

Summary

Even when reported on your tax return, a 1099-C does not automatically clear an unpaid balance from your credit report.

The editorial content below is based solely on the objective assessment of our writers and is not driven by advertising dollars. However, we may receive compensation when you click on links to products from our partners. Learn more about our advertising policy.

The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired. Please see the bank’s website for the most current version of card offers; and please review our list of best credit cards, or use our CardMatch™ tool to find cards matched to your needs.

 

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.

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

What’s up next?

In Expert Q&A

Is bankruptcy an option when illness wrecks finances?

Your first step is to create a detailed budget, then meet with a credit counselor.

Published: March 14, 2018

See more stories
Credit Card Rate Report Updated: November 13th, 2019
Business
15.14%
Airline
16.97%
Cash Back
17.16%
Reward
17.01%
Student
17.23%

Questions or comments?

Contact us

Editorial corrections policies

Learn more

Join the Discussion

We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company’s business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.