Cancellation of debt income

Apr 07, 2010

taxes on forgiven debt
by: Gerri

Thanks for submitting your debt collection question on our Q&A page.

Under our current tax code, forgiven debt is considered taxable income. Any time a creditor or collector forgives $600 or more in debt (which can include penalties or interest), it must send the consumer a 1099 reporting the amount of forgiven.

However, that doesn't mean that you will pay income tax on the forgiven debt. Debt discharged in bankruptcy, for example, is not considered taxable income. And there is an exceptions carved out for the certain types of forgiven mortgage debt. Additionally, if you can demonstrate to the IRS that you are insolvent at the time you settled (which basically means you owe more than you own), you can avoid having to pay taxes on the forgiven amount. I would urge you to talk with a tax advisor sooner rather than later to find out if he will owe taxes on the forgiven amount.

And as to your specific question, it doesn't matter whether you settled before or after you go to court. If the lender forgives $600 or more in debt, they must file a 1099.

Cancellation of debt income

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