Debt Forgiveness Can Be Costly

Many Hoosiers don’t know that forgiven, or canceled, debt is considered income by the IRS and must be reported as such on an individual or business tax return. Let’s say, for example, that you have $80,000 of credit card debt and are able to negotiate the payment of these accounts for fifty cents on the dollar. You refinance your home, take out $40,000 and pay off the credit cards. You have received $40,000 of income from the forgiveness of half the debt, and must report this income on your tax return.

You should receive a Form 1099-C Cancellation of Debt from the creditor. The creditor is also required to provide a copy of the 1099-C to the IRS.

There are a few limited exceptions. If the forgiveness was intended as a gift, the debt was canceled because of Hurricane Katrina, the student loan debt was canceled because of work you performed, or the price of property you purchased was reduced after the purchase, the forgiveness may not be considered income. There are a few other limited exceptions. For more information, consult IRS Publication 17, Chapter 12.