Chris Layton

When a creditor or lender accepts less than they are owed, the debtor often receives a Form 1099-C. This form is essentially requiring the individual to pay taxes on the amount of debt ‘forgiven’ by the lender. For example, if you have a credit card debt of $50,000 and settle with the credit card company for $35,000, you may expect a Form 1099-C for the $15,000 of ‘forgiven’ debt. It is treated as income to you for tax purposes.

Forgiveness Of Debt

The most common types of forgiveness of debt result from foreclosure, short sale and credit card settlement. The income due on forgiven debt can be substantial and weakens your position in a settlement because it is a fee you ultimately end up paying. Even worse, it’s due to the federal government so they have the power to garnish your wages if you fail to pay it.

The Difference A Bankruptcy Makes

When you file a bankruptcy, tax issues from forgiveness of debt are a non-issue. Any and all debt discharged through the bankruptcy is addressed fully as part of the discharge. You will not have any tax consequences as a result. If you receive a Form 1099-C from a lender or creditor and that debt was discharged through bankruptcy, you should call your bankruptcy attorney so they can assist in making sure it is addressed. Often lenders and creditors use automated systems and a phone call from the attorney can fix the situation.

A Phone Call Is Free

If you have any questions about income from forgiveness of debt, or if you are trying to decide between short sale, foreclosure or bankruptcy, please call me. I’m here to help you understand your options and make a decision. The call is free. 704.749.7747.