Rules for the 1099-C


Mortgage lenders, credit card companies and other creditors use Form 1099-C to report forgiven debt to the Internal Revenue Service. In most cases, the IRS considers the amount of forgiven debt as taxable income to the debtor. However, there are some exceptions to forgiven debt counting as income. If you receive a Form 1099-C, understanding how to report the forgiven debt on your tax return can help you avoid improperly filing your taxes and possibly incurring tax penalties.

1099-C Issuance

When a creditor forgives a debt in excess of $600, the IRS generally requires the creditor to issue a 1099-C documenting the forgiven debt. The creditor must send a copy of the 1099-C to both the IRS and to the debtor who benefited from the forgiven debt. However, if you do not receive a Form 1099-C from a creditor, you should still report the forgiven debt on your tax return. For forgiven debt that was not business-related, report the forgiven debt as income on line 21 of Form 1040 or 1040NR.

Mortgage Forgiveness

If you receive a 1099-C as a result of forgiven mortgage debt, you may be able to exclude the amount of forgiven debt from your taxable income. For the 2007 through 2012 tax year, you may exclude from income any forgiven mortgage debt up to $1 million or $2 million if filing jointly. This includes forgiven mortgage debt as a result of foreclosure and mortgage restructuring. You cannot exclude forgiven mortgage debt resulting from a second or rental home or any amount of forgiven debt from a home equity loan that you did not use to improve your home. For example, you cannot exclude forgiven debt from a home equity loan that you took out to pay for a vacation. To report the amounts on the 1099-C as forgiven mortgage debt, you will use Form 982.


The IRS also allows you to exclude from your taxable income any debt that a bankruptcy court discharges. This includes debts discharged as a result of Title 11 bankruptcy, which includes Chapters 7, 11 and 13 bankruptcy proceedings. However, even though the forgiven debt will not count as income, you still must report the forgiven amount to the IRS. Use Form 982 to report the forgiven debt to the IRS as forgiven due to a bankruptcy.


In addition to debts discharged through bankruptcy, you can also exclude forgiven debt if you can prove that you were insolvent immediately before the cancellation of the debt. You are insolvent if you owe more than you own. For example, if you have $200,000 in total debts and $50,000 in assets, you are insolvent by $150,000. However, when you calculate your assets for insolvency you must count assets that creditors normally cannot access, such as pension and other retirement plans. Due to the complexity of claiming you were insolvent, the IRS recommends that you consult a tax professional to assist you when preparing your tax return.

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