Form 1099-C: Cancellation of Debt [Do you owe taxes on forgiven debt?]

When a lender cancels or forgives your debt, it might feel like financial relief – until you receive Form 1099-C in the mail.

At this point, you may have several questions:

• Do I have to pay taxes on canceled debt?
• Where do I report Form 1099-C on my tax return?
• Are there ways to avoid paying tax on forgiven debt?

If you’ve received a 1099-C, you’re not alone. This guide explains everything you need to know about how canceled debt impacts your taxes, when it’s taxable, and how to legally reduce or eliminate your tax burden.

What is Form 1099-C?

Form 1099-C, Cancellation of Debt, is issued by a lender or financial institution when they forgive or cancel $600 or more of debt.

The IRS treats this as taxable income in most cases, meaning you may have to report it on your tax return.

Common situations where you might receive Form 1099-C

• Credit card debt settlements
• Mortgage foreclosures or short sales
• Auto loan repossessions
• Personal loan forgiveness
• Student loan forgiveness (unless excluded by federal law)
• Business loan cancellations
• Debt forgiveness through legal settlements

NOTE! Even if you never physically received cash from the lender, the IRS assumes that since you originally benefited from the loan, having it forgiven is equivalent to receiving income.

Who issues Form 1099-C & when do you receive it?

Who sends Form 1099-C?

Entities that cancel or forgive a debt of $600 or more are required to file Form 1099-C with the IRS and send a copy to the borrower.

These include:

• Banks and credit unions
• Credit card companies
• Mortgage lenders
• Debt collection agencies
• Government agencies (for student loan discharge or other programs)

When should you expect it?

Lenders must send Form 1099-C to taxpayers by January 31 of the year following the cancellation of the debt. If you had a debt forgiven in 2024, you should have received the form by January 31, 2025.

Since the IRS also receives a copy, failing to report it on your tax return could trigger an IRS notice or audit.

How to read & understand Form 1099-C

Understanding Form 1099-C is essential to ensure you report it correctly and avoid unnecessary taxes.

Below is a breakdown of the key sections of the form:

• Box 1: Date of the debt cancellation event. This is when the lender determined the debt was canceled, which might not always align with when you stopped making payments.
• Box 2: The total amount of canceled debt. This is the amount the IRS considers taxable unless an exclusion applies.
• Box 3: Interest included in the canceled amount, if applicable. This portion may or may not be taxable depending on how you originally deducted the interest.
• Box 4: Description of the debt, such as "credit card," "mortgage loan," or "auto loan."
• Box 5: Indicates whether you were personally liable for the debt. If marked "Yes," the lender could have pursued you for repayment. If "No," it was a non-recourse loan, meaning the lender could only seize collateral (e.g., your home in a foreclosure).
• Box 6: Identifies the reason for cancellation, such as bankruptcy, foreclosure, or settlement.
• Box 7: The fair market value of any property involved, which is important in foreclosure situations.

Pro tip: Always verify the accuracy of this form. If there are errors, contact the lender immediately to request a correction.

Form 1099-C preview

 

Is canceled debt always taxable? (Exceptions & exclusions)

While the IRS generally considers canceled debt to be taxable income, there are important exceptions that can prevent you from owing taxes on it.

When canceled debt IS taxable

You must report the forgiven amount as income unless one of the exclusions below applies.

For example, if a credit card company settles your $5,000 debt for $2,000, they will issue a 1099-C for the remaining $3,000, which is taxable unless you qualify for an exemption.

When canceled debt is NOT taxable

Certain situations allow you to exclude canceled debt from your taxable income, including:

• Bankruptcy (Chapter 7, 11, 13) – If your debt was discharged through a bankruptcy court, you do not owe taxes on it.
• Insolvency (Form 982) – If you were insolvent (your debts exceeded your assets) at the time of cancellation, you may be able to exclude some or all of the forgiven amount.
• Mortgage Debt Forgiveness – Certain mortgage debt cancellations related to foreclosures or short sales may be exempt under IRS rules.
• Public Service Loan Forgiveness & Disability Discharge – Certain student loan forgiveness programs are tax-free under federal law.
• Qualified Business & Farm Debt – Some business and farm-related debt forgiveness qualifies for exclusions under IRS rules.

Pro tip: If you qualify for one of these exclusions, you will need to file Form 982 with your tax return to formally request the exclusion.

How to report Form 1099-C on your tax return

If your canceled debt is taxable, follow these steps to properly report it on your tax return:

1. Locate Form 1099-C in your tax documents. You should receive it by January 31.
2. Report the canceled amount (Box 2) on your tax return. Enter it on Schedule 1, Line 8c (Other Income) of Form 1040.
3. If you qualify for an exclusion (e.g., insolvency, bankruptcy), file Form 982 to reduce or eliminate the taxable amount.
4. Verify the accuracy of the 1099-C and check for potential errors. If necessary, dispute incorrect information with the lender.

NB! Failing to report a 1099-C can result in IRS penalties or an audit, so be sure to include it in your return if required.

Common mistakes & how to handle an incorrect 1099-C

Common filing mistakes to avoid

• Ignoring the form – The IRS has a copy, so failing to report it can result in tax penalties.
• Paying tax when you don’t have to – Many taxpayers overlook exclusions like insolvency and pay unnecessary taxes.
• Not filing Form 982 – If you qualify for an exemption, you must file this form to legally exclude the forgiven amount from income.
• Not verifying the debt amount – Mistakes in Box 2 (canceled amount) or Box 3 (interest portion) can overstate your taxable income.

What to do if you receive a wrong 1099-C

• Contact the creditor and request a correction. Lenders do make mistakes.
• If they refuse, file Form 8275 (Disclosure Statement) with your tax return to explain the discrepancy.
• Seek professional tax help if the issue is complex or if the lender is uncooperative.

Final thoughts

Receiving a Form 1099-C doesn’t automatically mean you owe extra taxes, but you need to handle it correctly to avoid unnecessary IRS issues.

Some canceled debts are taxable, while others qualify for exclusions.