what is a 1099-c form

IRS Form 1099-C: What You Need to Know About Taxes on Discharged Debts

Having a credit account in default is never fun. You’ll have to survive debt collectors, negative marks on your credit score, and a ton of stress. If your creditor forgives or cancels your debt, you can set out on the path to recovery, but it’s important to understand the tax implications. For that, you’ll need to get familiar with Form 1099-C.

Do you owe taxes on your discharged debt? The answer depends on your circumstances. Read on to learn:

  • What the 1099-C form is.
  • When to file the 1099-C.
  • The exclusions and exceptions that may relieve you of your tax liability.
  • What to do when you receive a 1099-C.

What is form 1099-C, Cancellation of Debt?

In most cases, canceled or forgiven debt is considered taxable income. If your debt was worth $600 or more, you must file IRS form 1099-C for the amount discharged.

IRS 1099-C form download

If this applies to you, you’ll receive a 1099-C form in the mail. While there are exclusions and exceptions, this is the general rule. Each year, about 4 million 1099-C forms are filed.

Have you received a form or letter from the IRS that you don’t completely understand? Check our comprehensive guide to IRS letters and notices.

Taxes on a discharged debt

Do you have to pay taxes on a discharged debt?

If you received a 1099-C form, your discharged debt is considered taxable income unless you qualify for an exclusion or exception. Note that exceptions apply before the exclusions.


If your debt was discharged under the following circumstances, you won’t have to pay taxes on it.

  • The debt was canceled as a gift, bequest, devise, or inheritance.
  • Payment of the debt would have been a deductible expense.
  • The price of a property was reduced by the seller after the purchase.
  • Forgiveness/cancellation of certain student loan debt. However, not all student loan forgiveness programs are tax-exempt — make sure to read the fine print of your arrangement.
  • Reductions of a home mortgage’s principal balance due to Pay-for-Performance Success Payments under the Home Affordable Modification Program.


After applying all exceptions, you may still be able to exclude canceled debt in the following situations:

  • The debt was canceled as part of a title 11 bankruptcy.
  • Insolvency occurred immediately before the cancellation of the debt (in other words, your debt was worth more than your assets).
  • Qualified farm indebtedness, real property business indebtedness, or principal residence indebtedness.

If you end up excluding canceled debt from your income, you’ll have to fill out Form 982 to reduce certain tax attributes by the amount you’ll exclude. A tax professional can come in handy here.

If you need to know more about exceptions and exclusions, read IRS Publication 4681.

Who must file 1099-C?

Generally, any “applicable financial entity” who cancels a debt of $600 or more must file a 1099-C when an “identifiable event” occurs.

What is an applicable financial entity?

‘Applicable financial entities’ include:

  • Financial institutions (banks, trust companies, building and loan associations, and savings and loan associations).
  • Credit unions.
  • Corporate subsidiaries of financial institutions or credit unions.
  • Federal government agencies.
  • Lending organizations (e.g. credit card companies, finance companies, etc.).
  • Federal executive agencies, their successors or subunits (e.g. Federal Deposit Insurance Corporation (FDIC), The Resolution Trust Corporation (RTC), The National Credit Union Administration (NCUA), etc.).

In short, it’s almost any institution that extends loans or lines of credit.

What is an identifiable event?

According to the IRS, “identifiable events” include:

  • Debt discharged in a title 11 bankruptcy.
  • Other judicial debt relief.
  • Expiration of the statute of limitations on a debt.
  • Expiration of the deficiency period on a debt.
  • Foreclosure election.
  • Debt relief from probate or a similar proceeding.
  • Cancellation by agreement.
  • A decision or policy to discontinue collection efforts.
  • Another type of discharge before an identifiable event.

To illustrate, here are some examples of situations which require the filing of a 1099-C form:

  • A debtor charges $1,000 to a credit card and then stops paying. The credit card company discharges the debt and closes the account.
  • A debtor can’t repay a personal loan of $5,000 and agrees with the creditor to pay a $2,000 lump sum to settle the debt. The account is closed and $3,000 is discharged.
  • A borrower lost their job and can’t afford their car payments. Their vehicle is repossessed and sold at an auction for 65% of the remaining balance. The creditor discharges the difference between what is owed and what is recovered.

In these cases, the applicable financial institution must file the 1099-C for the amount of debt that was canceled.

What happens if you don’t file a 1099-C?

If a creditor accidentally fails to file Form 1099-C, they’ll face a penalty.

If a debtor receives a 1099-C and fails to report the qualifying amount as income on their taxes, they’ll likely receive notices from the IRS about an income discrepancy. This can lead to IRS interest charges, penalties, and even an audit.

How does a 1099-C affect your credit?

Form 1099-C has no direct impact on your credit report because it’s not sent to credit bureaus. Only the IRS and the debtor in question receive the form.

However, the creditor who files the 1099-C will usually report your default and discharged debt directly to the credit bureaus. This negative mark can remain on your credit report for up to seven years.

What to do if you receive a 1099-C form

If you receive a 1099-C form, here’s what to do.

First, make sure that all of the information is correct. Did you have a debt discharged in the amount stated? If so, it’s time to pursue any applicable exclusions or exceptions. Enlisting the aid of a competent tax professional can ensure that you don’t pay more than you have to.

Once you’ve applied all exclusions and exceptions, does some or all of your canceled debt still remain? Then that amount is considered taxable income. In other words, you’ll have to include that amount on your tax return as “other income” and pay taxes on it.

Need help hunting for exclusions?

Once taxes begin to get complicated, it can be helpful to have an expert in tax law on your side. Tax firms have experience with 1099-C forms and other issues that may arise. They can ensure that you file everything properly. And if an issue comes up down the road, they can also represent you in dealings with the IRS.

Not sure where to start? Review and compare leading tax firms here.