If you have settled a debt in which the creditor has written off or “forgiven” more than $600, you may receive a Form 1099-C and may have to include that amount in your gross, taxable income. However, in many circumstances, you may be able to avoid paying taxes on the amount forgiven. The IRS allows you to exclude the debt forgiveness income from your gross, taxable income when, among other things, the debt was:
1. Cancelled was discharged in a Title 11 bankruptcy case;
2. Cancelled when you were insolvent;
3. Related to a qualified principal residence.
If you have received a 1099-C for the portion of a debt that was written off in a debt settlement, contact an attorney or tax professional before paying any taxes on that amount. If you are considering debt settlement but have yet to pay any creditors, it is beneficial to formulate a debt settlement plan with an experienced attorney in order to avoid paying taxes on forgiven amounts, if possible.