What Is a 1099-C Form and How Does It Affect Your Credit?

The 1099-C cancellation of debt form deals with canceled or forgiven debt from the previous tax year. This form exists to ensure accuracy when reporting taxes and to help filers determine if they owe debt forgiveness taxes.

Cancellation of debt happens when a creditor discharges or forgives a debt you haven’t paid off. The IRS notes that cancellation can occur when the creditor gives up on collecting because it’s exhausted its resources and is unable to collect. In some cases, cancellation can come about as an agreement between you and the creditor. 

Here, we’ll answer several common questions about this form and explain how canceled debt relates to taxes. 

Key Takeaways: 

• The IRS requires 1099-C forms because forgiven debt contributes to your gross income.
• Receiving and filing a 1099-C form won’t affect your credit score positively or negatively.
• Certain forgiven debts, such as mortgage forgiveness, are exempt from 1099-C requirements.

What Is a 1099-C Form?

Form 1099-C is a tax form required by the IRS in certain situations where your debts have been forgiven or canceled. Forgiven debt contributes to your gross income for the given tax year. The IRS requests 1099-C forms to account for those funds and debt forgiveness tax if need be.

If you received a 1099-C form in the mail, it’s because of a debt cancellation that occurred at some point during the previous tax year. Box 6 on the document contains a code to help you determine why you received the form.

Reasons why a cancellation might occur include:

• A creditor stops trying to claim a debt.
• Your mortgage is modified.
• A property is foreclosed or repossessed. 

You can also learn more about the 1099-C cancellation of debt processes and why you might receive such a form if you’re unsure whether yours is accurate.

Is a 1099-C Form Good or Bad for Your Credit?

The 1099-C form shouldn’t have any impact on your credit. However, the activity that led to the 1099-C probably does impact your credit. Typically, by the time a creditor forgives a debt, you’ve engaged in at least one of the following activities:

• Failed to make payments for an extended period of time
• Negotiated a settlement on the debt
• Entered into a program with the creditor because you can’t pay the debt, such as a home short sale or voluntary repossession
• Been sent to collections
• Had a foreclosure or repossession
• Gone through bankruptcy

All those are negative items that can impact your credit report and score for years. So, while getting a 1099-C itself doesn’t change your credit at all, you’ve probably already experienced a negative hit to your score.

What Should You Do with a 1099-C Form?

First, find out whether the type of debt cancellation on the 1099-C form is excluded from taxable income. The IRS provides a list of exclusions; if your debt is included on this list, you won’t have to worry about the 1099-C form.

Some of the items on this list include:

• Canceled amounts that were gifts or inheritances
• Certain student loans and student loan discharges
• Qualifying purchase price reductions

If you ultimately need to claim the income, you must incorporate the 1099-C into your federal tax filing and report the canceled debt as “other income”.  Forgiven debt can increase your gross income for that tax year, which might reduce your refund or increase the taxes you owe. 

In cases where the 1099-C canceled debt falls under an IRS exclusion—which means you don’t have to pay taxes on all or some of the income—you still may need to file a form. The creditor that sent you the 1099-C also sent a copy to the IRS. 

Some types of debt cancellation on the 1099-C form are excluded from taxable income. The IRS provides a list of exclusions, which include debts that were forgiven because you were insolvent or involved in certain types of bankruptcies. You may want to double-check with your bankruptcy lawyer about whether you need to claim 1099-C income relevant to your bankruptcy discharge.

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If you don’t acknowledge the form and income on your tax filing, it could result in a tax audit. Luckily, the IRS provides a form for this purpose. It’s Form 982, the Reduction of Tax Attributes Due to Discharge of Indebtedness.

Who Can File a 1099-C Form?

According to the IRS, you can file a 1099-C form if you’ve forgiven or canceled at least $600 in debt for an individual or entity in the previous tax year. You must also be an applicable financial entity, such as a bank or credit union. 

For example, you don’t need to file a 1099-C form if you loaned your brother $1,000 and then told him on his birthday you’ve decided he doesn’t have to pay you back.

How to File a 1099-C Form

How you include your 1099-C depends on how you already file your taxes. Online tax filing programs include options for adding the 1099-C form when you file. Typically, you do this when entering various types of income.

You may need to file form 982 if you have exclusions to ensure you don’t pay more than you need to. You can work with a tax professional or use software to file taxes yourself. Both options can help you minimize mistakes and maximize your refund.

How to Read a 1099-C Form

Knowing how to read your 1099-C may help you understand why you got one and what you have to do with it. Here’s a breakdown of what each box means:

Codepen Link for 1099-C instructions

Codes that might be included in Box 6 on the 1099-C:

• A. Bankruptcy Title 11
• B. Other judicial debt relief
• C. Statute of limitations or expiration of deficiency period
• D. Foreclosure election
• E, Debt relief from probate or similar proceeding
• F. By agreement
• G. Decision or policy to discontinue collection
• H. Other actual discharge before identifiable event

What Is the Mortgage Forgiveness Debt Relief Act?

The Mortgage Forgiveness Debt Relief Act of 2007 generally excludes all forgiven debt on the mortgage of your primary residence. That means you may not have to include canceled debt on your mortgage as part of your income on your taxes. 

For example, if your debt is reduced through a restructuring of your mortgage or in connection with a foreclosure, it may be excluded. This is one of the most common exclusions, but there are a few other situations where you don’t have to include canceled debt.

1099-C Cancellation of Debt FAQ

Receiving a 1099-C form is a rare occurrence, which is why people often have so many questions about it. Here are several frequently asked questions we’ve encountered about this rare tax document.

What If You Receive a 1099-C Form on an Old Debt?

There aren’t statutes of limitations on the cancellation of debt, though the IRS does have rules about when these forms should be filed. The creditor must file a 1099-C the year following the calendar year when a qualifying event occurs. That just means the creditor must file the next year if they discharge or forgive a debt.

If the creditor files a 1099-C with the IRS, it typically must provide you with a copy by January 31 so you have it for tax filing purposes that year. This is similar to the rule for W-2s from employers and other tax forms.

However, there’s no rule for how long a creditor can carry debt on its books before it decides it’s uncollectible. So, if your debt isn’t canceled via repossession, bankruptcy or other such processes, cancellation could happen at any time. The creditor doesn’t have to tell you about it other than sending the 1099-C.

What If You Don’t Get Your 1099-C?

You may not receive a 1099-C or might receive it after you already filed your taxes. If you receive the form after you file, you should file an amended return. That’s true even if the 1099-C doesn’t change your tax obligation, as you want to get a Form 982 detailing the reasons for exclusion on record for documentation purposes. If you don’t receive a form at all, it may mean the creditor didn’t send one and you don’t have to file.

What If You Have a Canceled Debt That Is Less Than $600?

Canceled debt less than $600 still needs to be reported as income on your taxes, though you may not receive a 1099-C for it. Working with tax professionals may be a good idea if it’s unclear which form you should use and what income you need to claim.

What If You Misplaced Your 1099-C?

You should be able to contact the associated creditor for a copy of your 1099-C form if you lose it. If you can’t reach them or retrieve a copy, you may have to call the IRS to resolve the issue. 

What If Your 1099-C Form Is Incorrect?  

If your form is incorrect, you should contact the creditor to send a corrected version. If the creditor doesn’t send it before the tax deadline so you can file with the correct information, you’ll need to file an amended return when you receive it.

Though receiving a 1099-C doesn’t hurt your credit, the canceled debt that led to it probably will. It’s best to find other solutions to debt than delinquency or cancellation. You may be able to negotiate, refinance, or restructure your debt to make it more manageable.

Can a Creditor Still Collect After Issuing a 1099-C?

Yes, a creditor can still try to collect the debt a person owes even after a 1099-C has been issued. Even if a lender issues a 1099-C form, they can still choose to pursue delinquent funds if they simply want to collect the money you owe.

If you find yourself in this situation, reach out to your creditor as soon as possible and try to negotiate a new agreement.

What to Do If You Received a 1099-C Form after Filing Your Taxes

If you don’t know a 1099-C form is coming, you could make a mistake on your tax return by filing too early. If you receive the form after you file, you should file an amended return. That’s true even if the 1099-C doesn’t change your tax obligation, as you’ll want to get the Form 982 on record for documentation purposes. 

The IRS also allows amended tax returns to be e-filed, making it even easier to quickly file an amendment. However, you can only amend 2020, 2021, and 2022 returns in this manner.

Enrich Your Personal Finance Knowledge with Credit.com

Learning more about taxes and financial matters is easier than ever. You can always consult Credit.com’s expansive personal finance guide to learn more about topics like unpaid taxes, credit reports, and debt-to-income ratios.

Receiving and filing a form 1099-C shouldn’t affect your credit, so you check your credit report if you notice any strange fluctuations in your score. Use Credit.com’s ExtraCredit® subscription for a full view of your credit profile—you can even get started with a free seven-day trial.

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