Debt settlement
Form 1099-C and taxes on settled debt
Got a Form 1099-C after a debt was settled? Here is what the form reports, why forgiven debt is usually taxable, and how the IRS insolvency worksheet and Form 982 can reduce the tax, sometimes to zero.
Is the amount on a 1099-C taxable income?
Usually, yes. The IRS says in Topic 431 (IRS, opens in a new tab) that when a debt is canceled, forgiven or discharged for less than the amount owed, the canceled amount is generally taxable. A settlement is exactly that: the creditor accepts less and forgives the rest.
The forgiven part is added to your income for the year the debt was canceled. It is not a penalty, but it can raise your tax bill.
Here is an illustration. Say $20,000 of card debt settles for $9,000. The creditor has canceled $11,000, and that is the amount that may count as income, before any exclusion.
The figures are illustrative2. Real balances can grow with interest and fees before they settle, which changes the canceled amount.
What does Form 1099-C show, and when will you get one?
Form 1099-C, Cancellation of Debt, is how a creditor reports forgiven debt to you and to the IRS. The IRS instructions (IRS, opens in a new tab) require a lender to file one for each person whose canceled debt is $600 or more.
It covers the tax year in which the debt was canceled. If several accounts settle in different years, the forms can arrive in different years too.
| Box | What it shows | What to check |
|---|---|---|
| Box 2 | The amount of debt canceled | It matches your settlement letter |
| Box 4 | A description of the debt, such as a credit card | It is an account you settled |
| Box 5 | Whether you were personally liable | It fits the account |
| Box 6 | A code for the event that canceled the debt | It fits what happened |
Under $600, or no form at all? IRS Publication 4681 (IRS, opens in a new tab) says you must still report canceled debt unless an exclusion applies. Keep every settlement letter and proof of payment.
What is the insolvency exclusion?
Many people who settle debt are insolvent, and that can shrink the tax. Publication 4681 (IRS, opens in a new tab) says you were insolvent to the extent your total debts were more than the fair market value of everything you owned, measured immediately before the cancellation.
You can exclude canceled debt from income up to the amount you were insolvent, and no more. If you were insolvent by less than the canceled amount, the rest still counts as income.
Everything you own counts, including retirement accounts and a pension, even though creditors usually cannot reach them.
How do you fill in the IRS insolvency worksheet?
Publication 4681 (IRS, opens in a new tab) includes an insolvency worksheet with three parts. You fill it in as of the moment just before each cancellation, so two settlements months apart can need two worksheets.
Do not count the same debt or the same asset twice. Values are fair market value: what the thing would sell for, not what you paid.
| Part | Lines | What goes in |
|---|---|---|
| Part I: liabilities | Lines 1 to 15 | Credit cards, mortgages, car loans, medical bills, student loans, past-due taxes, judgments, business debts and any other debt, totaled on line 15 |
| Part II: assets | Lines 16 to 37 | Cash and bank balances, real estate, vehicles, household goods, retirement accounts, pension, life insurance cash value, deposits and investments, totaled on line 37 |
| Part III: insolvency | Line 38 | Line 15 minus line 37. Zero or less means you were not insolvent |
| Worksheet line | Amount |
|---|---|
| Line 1: credit card debt, including the card being settled | $20,000 |
| Line 3: car loan | $9,000 |
| Line 4: medical bills owed | $3,000 |
| Line 15: total liabilities | $32,000 |
| Line 16: cash and bank balances | $1,500 |
| Line 18: car | $11,000 |
| Line 20: household goods | $3,500 |
| Line 28: retirement accounts | $10,000 |
| Line 37: total assets | $26,000 |
| Line 38: insolvent by | $6,000 |
In this example $11,000 was canceled and the person was insolvent by $6,000. So $6,000 can be excluded from income, and $5,000 still counts as income.
Every figure in this worksheet is made up for the example2. Your own debts and assets decide the result.
How do you claim the exclusion with Form 982?
You claim it on your federal return. Publication 4681 (IRS, opens in a new tab) says to attach Form 982 (IRS, opens in a new tab) to your return, check the box on line 1b for the insolvency exclusion, and enter the amount you are excluding on line 2.
If only part of the canceled debt is excluded, the rest goes on your return as income. Keep the worksheet with your tax records in case the IRS asks how you got the number.
- Fill in one worksheet for each date a debt was canceled.
- Enter on line 2 the smaller of the canceled amount and line 38.
- Keep the worksheet, your settlement letters and your 1099-C forms together.
Excluding canceled debt can reduce certain tax attributes. A tax professional can tell you whether that matters for you.
Are there other ways forgiven debt is not taxed?
Topic 431 (IRS, opens in a new tab) lists a few other exclusions, each also claimed on Form 982. For most people settling credit card or medical debt, only insolvency is likely to fit.
| Exclusion | Does it usually fit a card settlement? |
|---|---|
| Debt canceled in a Title 11 bankruptcy case | Only if the debt is discharged in bankruptcy, not in a settlement |
| Debt canceled while insolvent | Often, depending on your debts and assets |
| Qualified farm debt | Rarely |
| Qualified real property business debt | Rarely |
| Qualified principal residence debt (canceled before 2026) | No. It covers home loans |
How should you plan for a tax bill after settlement?
Plan for it from the first settlement, not in April. Settlements happen one account at a time, so the tax can land across more than one year.
Ask a tax professional early, before your first account settles. They can check whether you are likely to be insolvent and roughly what you may owe, including any state income tax.
- Count forgiven debt as possible income in your budget for the year it settles.
- Set a little aside each month for the tax, if your budget allows.
- Write down your debts and assets on the date each account settles, while the numbers are easy to find.
Taxes are one cost among several; the full picture is in our debt settlement guide. When you are ready, see your own estimate, with the fee shown as its own line.
We do not give tax advice. Clear Financial Company can explain how settlement works; only a tax professional can advise you on your return.
Things you should know
The downsides, stated plainly.
Read these before you enroll anywhere, including with us. They apply to every debt settlement program.
- Your credit score will drop during the program, and late payments stay on your credit report.
- Creditors may keep collecting while you save, and they can sue. The program does not stop legal action.
- Interest and late fees can keep adding to your balances until each account settles.
- Forgiven debt may be taxable income. A creditor may send you IRS Form 1099-C.
- Fees apply. The fee is 20 to 29% of your enrolled debt, depending on your situation and how you enroll, charged only after a settlement is agreed and the first payment to the creditor is made.
- Not all creditors agree to settle, and not everyone completes the program.
- We do not guarantee any amount, percentage or timeline.
- Debt settlement is not available in all states. We are not a nonprofit or a credit counseling service, and we do not lend money.
- We do not give legal or tax advice. Talk to an attorney or a tax professional about your situation.
Notes on the figures and claims above
- 1Your credit score will drop during the program. Creditors may continue collection activity and can sue. Forgiven debt may be taxable income (IRS Form 1099-C). Fees apply. Not all creditors agree to settle. Most programs run 24 to 48 months, and most plans are set up for about 36 months. This page is general information, not tax advice. Talk to a tax professional about your situation.
- 2Figures on this site are illustrations, not offers or guarantees. Results vary; not all debts settle. Estimates assume creditors settle for 45 to 60% of enrolled balances, plus our fee of 20 to 29% of enrolled debt. Your fee percentage depends on your situation and how you enroll, is charged only after a settlement is agreed and a payment is made, and is stated in your written agreement. Estimates leave out the account provider's own fees, interest, late fees and taxes.
I got a 1099-C for a settled debt. Do I have to pay tax on it?
Maybe. The canceled amount is generally income, but if you were insolvent just before the cancellation you can exclude up to the amount you were insolvent by filing Form 982. The IRS insolvency worksheet in Publication 4681 shows the math.
Do I pay tax on the fee?
The fee is not canceled debt, so it is not part of the forgiven amount. Whether any of it affects your taxes is a question for a tax professional.
What if I never receive a Form 1099-C?
IRS Publication 4681 says you must still report canceled debt as income unless an exclusion applies. Keep your settlement letters as your record.
Is a settlement under $600 taxable?
The creditor may not have to send a form, but the IRS still treats canceled debt as income unless an exclusion applies. Tell your tax preparer about it.
Do retirement accounts count on the insolvency worksheet?
Yes. Publication 4681 counts everything you own, including retirement accounts and a pension, even though creditors usually cannot reach them.
Sources
Where the facts on this page come from. Each link opens the original in a new tab.
- 01 IRS Topic no. 431, Canceled debt: Is it taxable or not? (opens in a new tab)
- 02 IRS Publication 4681: Canceled Debts, Foreclosures, Repossessions, and Abandonments (opens in a new tab)
- 03 IRS Instructions for Forms 1099-A and 1099-C (file a 1099-C for canceled debt of $600 or more) (opens in a new tab)
- 04 IRS About Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (opens in a new tab)
- 05 IRS About Form 1099-C, Cancellation of Debt (opens in a new tab)
Next step
Ready for a clearer horizon?
Check your state, see your estimate, then decide. Nothing is signed until you say yes.
Four short steps
Your estimate first. Contact details last.
- 1How much you owea close guess is fine
- 2What kinds of debtpick all that apply
- 3Which state you live inchecked before anything else
- 4Your estimate, then a real person if you want one