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Am I still responsible for paying debt or taxes if I receive a 1099-C?

A 1099-C form is a tax form that you may receive if you’ve had cancellation of debt or forgiven debt. However, sometimes a creditor or debt collection company may still try to collect on a debt on which you received the form.

If you believe this is happening to you, here are potential tax consequences you may need to know.

What is IRS Form 1099-C?

If you’ve managed to settle a debt for less than what you owe, you’ll likely receive a 1099-C form in the mail during tax season. Lenders are required to issue one if the canceled debt was $600 or more.

Some cases where lenders may issue a 1099-C include but are not limited to:

  • Foreclosure or short sale of your property
  • Credit card debt settlement or forgiveness
  • Filing for bankruptcy
  • Other instances of debt cancellation

When you receive this form, you’ll need to include it on your tax return for the tax year and pay income tax. In many cases, that forgiven balance will be considered income.

Exceptions where you may not be taxed include:

  • The forgiveness is a gift from a friend or family member
  • You’re insolvent
  • The discharge was a result of bankruptcy
  • You received the cancelation under a certain student loan debt forgiveness program
  • It’s related to farm indebtedness or business-related real estate debt

In any case, it’s a good idea to hire a CPA or tax professional who can help you determine your tax liability.

This depends on how the debt was “forgiven.”  For example, if you made a settlement with your credit card company, that means you made a deal with them to pay a percentage of what you owed. That can be in a lump sum or installment payments, depending on the agreement.

In this case, the 1099-C you received will show the remainder of the balance you didn’t pay. You will not have to pay this back, but you may have to claim it as taxable income to the IRS.

However, in 2016, an IRS rule allowed debt collectors to file a 1099-C after 36 months of no payment. In this event, the account is still delinquent, but the debt hasn’t been forgiven, so the lender may still try to collect.

The IRS amended the rule later that year, so creditors are no longer expected to file a 1099-C just because it’s 36 months past due. But it is possible for it to still happen.

How to respond to a 1099-C?

If you settled a debt with a lender or collection agency, you can expect to receive a 1099-C. Make sure you receive confirmation of the settlement payment and forgiveness. That way, you can match it up with the information on the tax form.

If you’ve received a 1099-C on a debt you didn’t know what canceled, contact the creditor or debt collection agency immediately. You can verify whether the debt has been canceled and whether you need to take additional steps to make sure it’s legitimate.

Also, make sure that the debt hasn’t been simply charged off and sent to another collection agency. If that is truly the case and the letter was sent in error, you no longer have to pay the debt, but you may have to claim the entire balance owed as income.

Finally, if you’ve received a 1099-C and the lender is still trying to collect, contact them to understand the situation. If the creditor is working under the old rule on a debt that’s 36 months old, you can request that they rescind the 1099-C. Otherwise, you may owe taxes on a balance that was never forgiven.

If the creditor doesn’t rescind the tax form, you can file a dispute with the IRS.

The bottom line

Getting a 1099-C in the mail may be surprising. That’s especially the case if the creditor is still trying to collect on the debt listed on the tax form. If you get the form, contact the creditor to make sure it’s canceled. If not, you may need to work with the creditor or the IRS to make sure you’re not taxed on a debt you still owe.

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