You may have heard news stories about settling your credit card debt for substantially less than you owe. It is true that hungry creditors may agree to settle for as little as 30% of the debt. Those same creditors would file a 1099-C with the Internal Revenue Service for the 70% of the debt that they forgave. For example, if you owe the creditor $10,000 and they agree to settle with you for $3,000, they will file a 1099-C with the IRS for $7,000. The IRS will expect you to pay income tax on the forgiven debt as if it were income. This is referred to as Cancellation of Debt Income and can bring a very unpleasant surprise at tax time.
There are some important exceptions that may mean that you won’t be liable for tax on the forgiven debt. Before you decide to settle your debts for less than what you owe, you should consult a competent tax professional to understand the tax consequences of any debt settlement.
So what can you do if you receive a 1099-C? If you qualify, filing IRS Form 982 with your tax return may reduce or eliminate the tax from the forgiven debt. You can find Form 982 at www.irs.gov/pub/irs-pdf/f982.pdf.
