You settled a debt for less than you owed. Here's what to expect when you file your taxes.
Summary
Debt forgiven in a settlement may count as taxable income and increase a borrower’s tax bill. Creditors generally report cancellations of $600 or more on Form 1099-C, but exclusions such as insolvency may reduce or eliminate the taxable amount.Key Facts
- A borrower who settles a $15,000 credit-card debt for $6,000 has $9,000 in canceled debt.
- Canceled debt is generally treated as income, though the borrower does not pay that full amount as tax.
- Creditors generally report canceled debt of $600 or more to the IRS on Form 1099-C.
- A borrower who settles a debt in 2026 would typically receive any related Form 1099-C in early 2027.
- Not receiving Form 1099-C does not by itself remove a borrower’s responsibility to report taxable canceled debt.
- The insolvency exclusion may apply when a borrower’s debts exceed the fair market value of their assets immediately before cancellation.
- Under the insolvency exclusion, a borrower may exclude canceled debt up to the amount by which their debts exceed their assets.
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