When is a 1099-C Issued For Debt Settlement?
Written by: Kristy Welsh
Last Updated: July 19, 2017
If and when you settle a debt for less than what you owe, it feels like a done-deal to be celebrated. But temper that sigh of relief with the knowledge that, though you may no longer be required to pay back said debt, the IRS expects you to claim that amount as income. How can they possibly know how much of your debts have been forgiven? The creditor who forgave the debt will issue you a 1099-C form. They're not doing this to get even. Creditors are required to file this form with the IRS under certain circumstances surrounding cancellation of debt.
What is a 1099-C Form?
A 1099-C is a cancellation of debt form filed with the IRS by a creditor that has either 1) reached a settlement with a debtor for less than was originally owed, or has 2) forgiven the entire debt, concluding it will never be able to collect the debt.
What Sort of Debt Qualifies for Inclusion on a 1099-C Form?
Debt that may be claimed on a 1099-C form includes stated principal, stated interest, fees, penalties, administrative costs, and fines.
What is the Significance of a 1099-C Form to the Debtor?
If and when a creditor issues a 1099-C in your name to the IRS, whatever amount is included on the form is considered income that you must claim and pay taxes on.
When is a Lender Required to File a 1099-C?
Creditors must file a 1099-C with both the IRS and with the debtor for all debts of $600 or more under the following circumstances:
- Cancellation or extinguishment making the debt unenforceable in a receivership, foreclosure, or similar federal or state court proceeding.
- Cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. Expiration of the statute of limitations is an identifiable event only when a debtor's affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired.
- Cancellation or extinguishment when the creditor elects foreclosure remedies that by law end or bar the creditor's right to collect the debt.
- Discharge of indebtedness by agreement between the creditor and the debtor to cancel the debt at less than full consideration.
- Discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. A creditor's defined policy can be in writing or an established business practice of the creditor. A creditor's practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy.
- The expiration of nonpayment testing period. This event occurs when the creditor has not received a payment on the debt for a 36 month period beginning on December 31st. (this 36 month period is rebuttable by creditor based on facts and circumstances)
What Information is Included on a 1099-C Form?
- Date debt was canceled.
- Amount of canceled debt.
- Amount of canceled debt attributable to principal only, reduced by any amount received by lender in satisfaction of debt.
- Description of origin of debt (i.e., student loan, mortgage, or credit cards).
Am I Required to Report as Income an Amount Filed Via a 1099-C by a Collection Agency, or Only if it is Filed by the Original Creditor?
It depends on whether or not the collection agency can prove you owe the debt, which they may not be able to do since your account may have been transferred so many times that the proof of your debt has been left behind in the process.
Debt validation is key. If the collection agency cannot prove that you owe the debt, but they have filed a 1099-C, you may include with your tax return a letter stating that said agency has no proof that you owe the debt.
Can a Collection Agency Issue a 1099-C?
I filed Bankruptcy Can They File a 1099-C on Discharged Debts?
No, they cannot. However, you must file a form. Title 11 of the bankruptcy code states you can file form 981 to get rid of the debt.