An Iowa resident who receives forgiveness for part or all of one or more
outstanding debts by a creditor might be surprised when a 1099-C federal
tax form arrives. It may be a relief to be rid of the outstanding debts,
but forgiven debt can be considered as income. This is because credit
card debt involves an obligation to repay. Removal of this obligation
is viewed as a form of income.
There are some situations in which cancelled debt might not be considered
as personal income. For example, an individual's insolvency at the
time of a cancelled debt could result in that amount not being taxed.
Insolvency occurs if an individual's debts exceed the fair market
value of assets. Bankruptcy is another scenario in which cancelled or
discharged debts are not counted as income.
An individual who is dealing with a challenging financial situation might
think that seeking a settlement directly with a creditor would provide
the most effective method of getting a fresh start. However, it may be
beneficial to consider both debt negotiation and bankruptcy if a large
amount of debt is owed. If the tax implications associated with unsecured
debt being forgiven are too great, it might be a better choice to file
Legal assistance may be helpful in evaluating the pros and cons of both
bankruptcy and debt negotiation. As part of the
bankruptcy process, credit counseling will be required, during which time various avenues
could be explored for mitigating excessive debt. The long-term ramifications
of both debt negotiation and bankruptcy may also be compared so that there
is a clear understanding of how credit will be re-established after the
action is taken.
Source: Monterey Herald,
"Barry Dolowich, Tax Tips: Cancellation of debt income", Barry Dolowich, Feb. 17, 2015