ANSWERS: 1
  • A 1099-C tax form is officially called "1099-C: Cancellation of Debt." When an individual has either settled for less than a debt owed; is unable to pay any of the debt; or the creditor decides to write off the outstanding debt as a financial loss to their business, the creditor will report their financial loss to the IRS. The IRS views this outstanding debt as supplemental or gained income by the debtor, and issues a 1099-C to the debtor in order to collect income tax on the debt.

    Identification

    At the end of a tax year, the lending agency with an outstanding debt greater than $600 will send 1099-C tax forms to the IRS and the debtor. The function of the 1099-C is for the debtor to report the amount forgiven so the IRS can apply income tax.

    Exceptions

    The 1099-C tax forms are not issued or necessary when any of the following apply: an individual has filed for bankruptcy during that fiscal year; the debt was forgiven in full as a gift; or the individual's collective outstanding debts are greater than their income.

    Prevention/Solution

    When an individual finds that their debt is increasing, and they are either unable or struggling to repay, it is recommended that the individual speak with the lending institution about repayment options as soon as possible. The 1099-C tax forms are typically issued after a debt has gone unacknowledged for several years, at which point the debtor has likely been notified through telephone calls, offered settlements outside of claims court, been reported to collection agencies, and received multiple attempts to collect on the debt. If an individual receives a 1099-C form, it is advisable they speak to a professional tax adviser immediately.

    Foreclosure, Credit Cards, Student Loans

    When a homeowner defaults on their mortgage repayment, they may qualify for protection by the Mortgage Forgiveness Debt Relief Act. Credit card companies, financial institutions and student loans all have various means for collection on debt before issuing 1099-C tax forms. Speak to an adviser if a debt cannot be repaid as soon as possible.

    Tax Law

    Tax laws on the terms of the cancellation of a debt vary from state to state. Consult with a tax or financial adviser for further information.

    Source:

    Nolo: Tax Consequences of 1099-C

    IRS: Instructions

    Creditcards.com: Credit Cards and 1099-C

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