Does Debt Settlement Have to Be Reported to the IRS?

While debt settlement can be a benefit to you, because you will end up paying less on a bill than you owe, the amount of the debt that is forgiven generally must be reported to the Internal Revenue Service. Form 1099-C is the usual form a creditor uses to report canceled debt to the IRS, provided the amount of the debt is over $600. If the canceled debt amount is under $600, the benefiting taxpayer is responsible for reporting the debt as other income on Form 1040. Some types of forgiven debt can be excluded from income by filing the correct forms.

Form 1099-C

Form 1099-C lists the total amount of the debt forgiven in box 2. A description of the debt is listed in box 4. Your personal responsibility for the debt is indicated with a check mark in box 5. In addition, regular identifying information shows on Form 1099-C, such as the taxpayer's identification number, or Social Security number, account number and the creditor's identifying information.

Claiming the Income

You must claim the taxable amount of debt discharge from the 1099-C on your federal tax form. Enter the amount under other income on line 21 of your form 1040. Add it in to your other forms of income to arrive at your total taxable income, which you enter on line 22 of form 1040.

Mortgage Debt Forgiveness

If you have canceled debt from a mortgage loan, such as with a short sale, the cancelled mortgage debt may be tax-exempt. To qualify, you must be excluding less than $2 million in mortgage loan indebtedness on your primary residence, or $1 million if you are married and filing separately. The forgiven debt must be from the purchase or improvement of the property. You must file Form 982 to exclude the forgiven mortgage amount from your income.


If you receive a 1099-C reporting forgiven debt as income but you are insolvent, you can exclude this reported forgiven debt from your income. You file Form 982, checking box B, and entering the amount of forgiven debt that you are exempting from taxes on line 2. Insolvency means that your total indebtedness exceeds the amount of your total assets. This includes all assets, even those pledged as collateral for debt, and all indebtedness, even indebtedness that is not discharged.


Debts discharged in a Chapter 13 or Chapter 7 bankruptcy are not taxable. These discharged debts do not have to be reported to the IRS on Form 1099-C. Some lenders do mistakenly report these discharged debts on Form 1099-C. In this case, you can contact the lender for an updated Form 1099-C, or you can file Form 982 with your tax return and check box 1A, showing the debt is discharged in a bankruptcy case.

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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