Settling A Debt: 1099C From The IRS

According to IRS policy, when a debt is settled and the amount forgiven is $600 or more, the amount you have saved may be considered income. A creditor could remit a 1099-C form at year-end for the amount “forgiven”. Not all clients receive 1099-C forms; this is the responsibility of the creditor and they may or may not follow through.

If you receive a 1099-C form, you will have to include the amount of your debt forgiven as part of your current year’s income.

However, there are two possible ways to offset claiming your savings as income.

1. If you itemize your deductions the debt settlement fee associated with the particular debt you have settled is tax deductible. This should help offset the amount considered additional income. Please refer to you monthly statement from your debt settlement company for particular settlement fee information.

2. The IRS insolvency law (section 108) allows clients who are insolvent not to claim forgiven debt up the amount they are insolvent. Insolvent means you have a negative net worth (i.e. If you liabilities or debts outweigh your assets).

Example: If you have a $5,000 debt settled for $2,500, your creditor might remit a 1099-C to you and the IRS for the $2,500 representing the “forgiven amount” of your debt.

WHAT TO DO:

1. You would have to declare your forgiven debt as “other income”, but may claim your the settlement fee as an itemized tax deduction against the amount of your forgiven debt -or-

2. You could prepare a Net Worth Statement (see attachment) listing the fair market value of all your assets vs. your liabilities prior to the cancellation of your debt. If your liabilities (loans, debts, etc.) outweigh your assets by, say, $4,000, you would not have to claim any of your forgiven debt as income. However, if you are insolvent by only $1,000, then you would be obligated to claim $1,500 of your forgiven debt as income.

You should always review tax information and filing procedures with your tax professional. For more infoamtion on this topic of taxable debt settlement amounts, please visit the IRS website at