Forgiven Debt – 1099-C Surprise

Like many Americans, you’ve had some credit mishaps in the past. But you were greatly relieved when you settled one of them last year – the one that involved your unpaid credit card debt. Aside from the relief you felt, you were also happy – happy that you settled with the debt collector by agreeing to pay several thousand dollars less than what you actually owed.

But now your relief and happiness has turned to confusion, as you’ve received a 1099-C, or a cancelation of debt notice, that you’ll have to claim the forgiven debt as taxable income. What gives?

While the scenario described above is nothing more than a hypothetical, it’s also a situation that accurately depicts what a lot of consumers experience per year – that the IRS considers some forgiven debt as taxable income. And when Uncle Sam comes knocking, it’s time to pay up…

1099-C Explained

As we noted in the opening, the 1099-C form is a cancelation of debt form. And if you’ve settled a debt that’s at least $600 less than the original balance, the IRS considers that taxable income. Depending on the amount of debt settled, this 1099-C form can have a sizeable reduction in the refund you’re due – or even significantly increase the tax payment you’re due to turn in on tax day.

There are some exceptions, and the experts advise that you consult with an accountant to learn whether or not you qualify for them if you get a 1099-C in the mail.

Avoiding the 1099-C

The issue of the 1099-C and forgiven debt as taxable income is a good time to remind you of some ways to stay out of credit trouble. After all, not only do negatives on your report impact your credit score, but they can also be a financial burden.

  • Get smart: Most people make these credit mistakes when they’re young, usually before age 30. So before you open a line of credit, brush up on your financial planning tactics and know the importance of a good credit score. It’s easy to read these things and say “that’ll never be me,” but this is reality – it very well could be you.
  • Pay on time: Many people fall into a downward spiral of debt when they fail to pay on time and just keep putting off payment until it goes to collections. Pay on time – even if it’s just the minimum payment.
  • Make high-interest debt a priority: The larger the interest rate, the more you’ll be paying over time. So if you have numerous balances, make sure you’re making the required payments on all of them – but put the high-interest ones first. You’ll save more in the long run.