Can a Bank Send Me a 1099 C Cancellation of Debt?

by Craig Woodman

    A lender must file a Form 1099 C when it forgives or cancels debt and send a copy of this form to you and the Internal Revenue Service. Examples are when you complete a short sale of your home or a credit card company accepts a lower payoff amount on your balance. With bankruptcy, a creditor cannot send a 1099 C for the discharged debt. Receiving the 1099 C from a lender does not mean the cancelled debt is income; you may be able to exempt this canceled debt.

    Certain canceled debts are considered income and must be reported as such on your income tax returns. If a lender cancels more than $600 of your debt in a year, in many cases it must file a Form 1099 C.

    Form 1099 C is a one-page form giving some basic details about the borrower, the lender and the debt. It includes both the creditor's and borrower's tax identification numbers so the IRS can match the forms up correctly. The amount of the canceled debt is shown in Box 2, and a description of the debt is listed in Box 4. The check box in Box 5 indicates whether the borrower is personally responsible for the debt.

    If a lender forgives part of your mortgage balance as part of a foreclosure or short sale, that forgiven amount isn't always taxable. You can exempt up to $2 million if you are married filing a joint return for mortgage debt forgiveness. The mortgage loan must have been to buy or improve the property. The lender will still send a Form 1099 C indicating the forgiven amount; you need to account for this when filing your taxes.

    If your debts are discharged in Chapter 7 or Chapter 13 bankruptcy, the amount of discharged debt is not taxable to the debtor. The creditor does not report this amount of discharged debt on Form 1099 C. If you receive a Form 1099 C for bankruptcy-discharged debts, contact the creditor to have this error corrected.

    If you are insolvent when a debt is canceled, you do not owe taxes on this canceled debt. If you owe more in debts than the fair market value of your assets, you are insolvent. A lender will still send you a Form 1099 C for canceled debt so you can report the amount to the IRS.

    If you borrowed money on a non-recourse loan, any forgiven amount of the loan is not taxable as long as the lender repossesses the collateral. A non-recourse means that the lender cannot pursue payment directly from you in case of default but can only repossess the property that secured the loan. If the bank forgives the loan or reduces the balance and you keep the collateral, the amount of the loan reduction is taxable, and you will receive a Form 1099 C for this amount.

    Form 982 is the tax form you use to show forgiven debts for which you received a 1099 C and to exempt these amounts from your taxes if you are eligible. Use Form 982 in case of a short sale on your home or if you are insolvent to exempt this income. Do not just ignore the Form 1099 C, as the IRS will expect you to include this income when you file your taxes.

    About the Author

    Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.

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