Quick Summary: Usually, a 1099-C means the debt was canceled and you no longer owe it. But there are exceptions. Some creditors file a 1099-C after 36 months of no payment even though the debt hasn’t been forgiven. If a creditor is still trying to collect after sending you a 1099-C, contact them to clarify whether the debt was actually canceled. You may need help from an attorney or tax professional to sort it out.
What Is a 1099-C Form?
A 1099-C is a tax form that creditors send when they cancel or forgive $600 or more of your debt. The IRS requires lenders to report canceled debt because it’s usually considered taxable income. You’ll typically receive this form during tax season if you had debt forgiven the previous year.
Common situations that trigger a 1099-C include:
- Credit card debt settlement (paying less than you owed)
- Foreclosure or short sale of property
- Bankruptcy discharge
- Student loan forgiveness programs
- Debt charged off by the original creditor
The form shows the amount of debt that was canceled. In most cases, you’ll need to report this amount as income on your tax return and may owe taxes on it.
Does a 1099-C Mean I Don’t Owe the Debt?
Usually, yes. If a creditor sends you a 1099-C, it typically means they’ve canceled the debt and you don’t have to pay it back. The trade-off is that you may owe taxes on the forgiven amount.
However, there’s an important exception. In 2016, the IRS created a rule that allowed creditors to file a 1099-C after 36 months of non-payment, even if the debt wasn’t actually forgiven. The IRS later changed this rule, but some creditors still follow the old practice.
This creates a confusing situation: you might receive a 1099-C and still have collectors calling you about the same debt. If that happens, the debt may not have been truly canceled.
Can Creditors Still Collect After Sending a 1099-C?
It depends on why they sent the form. Here’s how to tell the difference:
If you settled the debt: When you negotiate a settlement and pay the agreed amount, the remaining balance is forgiven. The 1099-C reflects that forgiven portion. You don’t owe it, but you may owe taxes on it. The creditor should not try to collect.
If the creditor filed based on the 36-month rule: Some creditors file a 1099-C simply because you haven’t paid in three years. In this case, the debt may still be active. The creditor or a collection agency can legally continue trying to collect, even though they sent you a tax form saying it was canceled.
If the debt was charged off: A charge-off means the original creditor wrote off the debt as a loss. They may send a 1099-C, but they can also sell the debt to a collection agency. The new owner might try to collect, even though you received the form.
This is why it’s important to keep records of any settlement agreements and confirmation letters. Without proof that the debt was truly forgiven, you could end up owing both the debt and taxes on it.
Do I Have to Pay Taxes on Canceled Debt?
In most cases, yes. The IRS treats canceled debt as income because you received money (the loan) but didn’t have to pay it all back. You’ll need to report the amount on your tax return.
However, there are exceptions where you won’t owe taxes:
- Bankruptcy: Debt discharged through bankruptcy is not taxable
- Insolvency: If your debts exceeded your assets when the debt was canceled, you may qualify for an exclusion
- Certain student loans: Some student loan forgiveness programs are tax-exempt
- Qualified farm debt: Special rules apply to farm-related debt
- Qualified real property business debt: Certain business real estate debt may qualify
- Gifts: If a friend or family member forgave your debt as a gift, it’s not taxable income
To claim an exception, you’ll need to file IRS Form 982 with your tax return. A CPA or tax professional can help you figure out if you qualify.
What Should I Do If I Receive a 1099-C?
Take these steps to protect yourself:
1. Verify the debt was actually canceled. Contact the creditor or collection agency that sent the form. Ask them to confirm in writing that the debt has been forgiven and they will not attempt to collect.
2. Check your records. If you settled the debt, find your settlement agreement and payment confirmation. Make sure the 1099-C amount matches what you expected.
3. Check the statute of limitations. Even if the debt wasn’t formally canceled, creditors can only sue you for a limited time. In New York, the statute of limitations on most debts is six years. If the time has passed, they can’t take you to court.
4. Talk to a tax professional. A CPA can help you understand whether you owe taxes and if any exceptions apply to your situation.
5. Keep the form for your records. You’ll need it when you file your taxes, and it’s useful evidence if there’s ever a dispute about the debt.
What If a Creditor Won’t Stop Collecting?
If you’ve received a 1099-C but the creditor keeps trying to collect, you have options:
Request they rescind the 1099-C. If the debt wasn’t actually canceled, the creditor should withdraw the tax form. Otherwise, you could owe taxes on money you still have to repay.
Dispute with the IRS. If the creditor won’t rescind the form, you can file a dispute with the IRS. This protects you from paying taxes on debt that wasn’t truly forgiven.
Get legal help. A debt relief attorney can review your situation, communicate with the creditor, and help you understand your rights. If the creditor is violating debt collection laws, you may have grounds to fight back.
Get Help With Debt Collection Issues
Receiving a 1099-C can be confusing, especially if creditors are still calling. You shouldn’t have to pay both the debt and taxes on it. If you’re not sure where you stand, a debt relief attorney can help you sort out the situation and protect your rights.
Tayne Law Group has over 20 years of experience helping people resolve debt problems. Call (866) 890-7337 for a free consultation, or fill out our short contact form. All conversations are confidential, and we never share your information.
Frequently Asked Questions
Does a 1099-C wipe out my debt?
Not automatically. A 1099-C is a tax form, not a legal release of debt. In most cases, if you receive one, the debt has been canceled. But some creditors file the form after 36 months of non-payment even if the debt is still active. Always confirm with the creditor that the debt was actually forgiven.
Can I be sued for debt after receiving a 1099-C?
Possibly. If the creditor filed the form under the 36-month rule but didn’t actually cancel the debt, they or a collection agency could still sue you. Check the statute of limitations in your state. If it has expired, they can’t take you to court.
What if I can’t afford to pay taxes on canceled debt?
You may qualify for an exclusion. If you were insolvent (your debts exceeded your assets) when the debt was canceled, you might not owe taxes on it. A tax professional can help you file IRS Form 982 to claim this exclusion.
Should I ignore a 1099-C?
No. The IRS receives a copy of every 1099-C that’s issued. If you don’t report it on your tax return, you could face penalties and interest. Even if you think the form was sent in error, report it and file Form 982 if an exclusion applies.
How do I know if my debt was really canceled?
Contact the creditor directly and ask for written confirmation that the debt has been forgiven and no further collection will occur. If you negotiated a settlement, you should have a settlement agreement that spells this out. Keep all documentation in case questions arise later.
