Form 1099-C: Cancellation of Debt (2021) – Complete Guide
What Form 1099-C Is For
Form 1099-C, Cancellation of Debt, is an official IRS tax document that reports when a financial institution or creditor cancels or forgives $600 or more of debt you owed. When you borrow money and are legally obligated to repay it, but later the creditor forgives part or all of what you owe, the IRS generally considers that canceled amount as taxable income—just as if you had earned wages or received a payment.
Think of it this way: if you borrowed $10,000 on a credit card and the credit card company later agrees to accept $4,000 as full payment, you've essentially received a $6,000 financial benefit. The IRS views this $6,000 as income you must report on your tax return. The creditor files Form 1099-C with the IRS to document this cancellation and sends you a copy so you know what to report.
Creditors required to file this form include banks, credit unions, mortgage companies, credit card issuers, federal agencies like the Federal Deposit Insurance Corporation, and other financial organizations whose primary business involves lending money. Form 1099-C applies to various types of debt: personal credit cards, mortgages, car loans, student loans, business debts, and medical bills IRS.gov.
When You’d Use Form 1099-C (Late/Amended Filing)
You typically receive Form 1099-C in January or February of the year after your debt was canceled. For example, if your debt was canceled anytime during 2021, you should receive the form by February 2022 for inclusion on your 2021 tax return.
Late Filing Situations
If you discover you should have reported canceled debt from a prior year but didn't, you'll need to file an amended return using Form 1040-X for that specific tax year. The IRS generally allows three years from your original filing date to amend a return. Even if you never received a Form 1099-C, you're still legally required to report canceled debt if it's taxable.
When You Might Receive a Late 1099-C
Sometimes creditors send Form 1099-C years after you thought a debt was settled. This happens when an "identifiable event" finally occurs—such as when a statute of limitations expires, a bankruptcy is finalized, or the creditor officially writes off the debt in their accounting system. If you receive a 1099-C for an old debt, carefully verify the "Date of Identifiable Event" in Box 1, as this determines which tax year the income belongs to IRS Publication 4681.
Disputing Errors
If your Form 1099-C contains incorrect information—wrong amount, wrong date, or reporting a debt you're still paying—contact the creditor immediately to request a corrected form. Don't ignore errors; your tax return should reflect accurate information.
Key Rules or Details for 2021
- The $600 Threshold: Creditors must file Form 1099-C only when they cancel $600 or more of debt. However, even if your canceled debt is less than $600, you're still required to report it as income if it's taxable.
- Eight Identifiable Events: Debt is officially "canceled" when one of these events occurs: (A) discharge in bankruptcy, (B) cancellation through a court proceeding like foreclosure, (C) statute of limitations expiration, (D) foreclosure that legally bars collection, (E) discharge through probate court, (F) settlement agreement for less than full amount, (G) creditor's decision to stop collection and write off the debt, or (H) actual discharge before other events. Box 6 of your 1099-C shows which event code applies to your situation IRS Instructions 1099-A and 1099-C 2021.
- Taxable vs. Excluded Debt: While canceled debt is generally taxable, important exclusions existed in 2021. You could exclude canceled debt from income if: your debt was canceled through Title 11 bankruptcy; you were insolvent (liabilities exceeded assets) immediately before cancellation; the debt was qualified farm indebtedness; the debt was qualified real property business indebtedness; or the debt was qualified principal residence indebtedness discharged before January 1, 2026. Each exclusion has specific requirements and requires you to file Form 982 to claim it IRS Topic 431.
- Special Student Loan Rules for 2021: A significant change occurred in 2021. The American Rescue Plan Act made student loan forgiveness tax-free for discharges occurring between December 31, 2020, and January 1, 2026. This means if your student loan was canceled in 2021, you generally wouldn't owe taxes on it—and the lender wouldn't send you a 1099-C.
- Recourse vs. Nonrecourse Debt: Understanding whether you're personally liable matters. Recourse debt means you're personally liable; if property securing the loan is repossessed and doesn't cover the full debt, the remaining balance canceled is typically taxable income. Nonrecourse debt means only the property secures the loan; foreclosure or repossession doesn't create cancellation of debt income, though you may have capital gains or losses from the property disposition.
Step-by-Step (High Level)
Step 1: Receive and Review the Form
When Form 1099-C arrives, carefully examine all boxes. Box 1 shows the date of the identifiable event (which tax year it belongs to). Box 2 shows the canceled debt amount—this is what the IRS believes you received as income. Box 3 shows any interest included in Box 2. Box 4 describes the debt type. Box 5 indicates whether you were personally liable. Box 6 shows the identifiable event code. Box 7 shows fair market value of any property involved.
Step 2: Determine If Exceptions Apply
Check whether your situation qualifies for an exception where canceled debt isn't considered income at all: Was the debt a gift from family? Was it a qualified student loan with work-related forgiveness provisions? Was it a student loan discharged in 2021 under the American Rescue Plan? Would the payment have been tax-deductible anyway (like business expenses)? Was it a price reduction from the original seller?
Step 3: Evaluate Exclusions
If no exceptions apply, determine whether you qualify for an exclusion. The most common is the insolvency exclusion—if your total debts exceeded your total assets immediately before cancellation, you can exclude some or all of the canceled debt. Calculate your insolvency using the worksheet in IRS Publication 4681. Other exclusions include bankruptcy (you must be the debtor in a Title 11 case), qualified principal residence indebtedness (mortgage on your main home), qualified farm debt, and qualified real property business debt.
Step 4: Complete Form 982 (If Applicable)
If you qualify for an exclusion, you must file Form 982, Reduction of Tax Attributes, with your tax return. This form tells the IRS which exclusion you're claiming and how much debt you're excluding from income. Important: when you exclude canceled debt, you must reduce your "tax attributes"—this might mean reducing your basis in property, reducing carryforward losses, or reducing certain credits. Form 982 walks you through these reductions.
Step 5: Report on Your Tax Return
Any canceled debt that's taxable (after applying exceptions and exclusions) must be reported as ordinary income. For 2021, you report nonbusiness canceled debt on Schedule 1 (Form 1040), line 8z. Business-related canceled debt goes on Schedule C (line 6), Schedule E (line 3), Schedule F (line 8), or Form 4835 (line 6), depending on the business type.
Step 6: Keep Documentation
Maintain copies of Form 1099-C, Form 982, insolvency calculations, and any correspondence with creditors for at least four years in case the IRS has questions.
Common Mistakes and How to Avoid Them
Mistake #1: Ignoring Form 1099-C
Many taxpayers see canceled debt and think "I didn't receive cash, so it's not income." Wrong. The IRS receives a copy of your 1099-C and expects you to report it. Ignoring it can trigger an IRS notice proposing additional tax, penalties, and interest. Solution: Always address Form 1099-C on your return, even if you believe you don't owe tax on it—use Form 982 to claim an exclusion.
Mistake #2: Not Checking for Insolvency
Taxpayers often assume they must pay tax on canceled debt without realizing they qualify for the insolvency exclusion. If you were drowning in debt when the cancellation occurred, you may owe little or no tax. Solution: Complete the Insolvency Worksheet in Publication 4681. Include all debts (even those not canceled) and all assets (including retirement accounts and exempt property). Many people qualify for partial or full exclusion.
Mistake #3: Confusing Form 1099-A and 1099-C
Form 1099-A reports property acquisition or abandonment, while 1099-C reports debt cancellation. Sometimes you receive both, sometimes just one combined form. Receiving 1099-A doesn't automatically mean you have cancellation of debt income. Solution: If you receive 1099-A, calculate whether you have cancellation of debt separately—it depends on whether the debt was recourse or nonrecourse and whether the property's value covered the loan balance.
Mistake #4: Forgetting to Reduce Tax Attributes
When you exclude canceled debt using Form 982, you must reduce tax attributes. Forgetting this step means you've incorrectly understated future taxable income. Solution: Complete Part II of Form 982 carefully, reducing basis in property or other attributes as required by the specific exclusion you're claiming.
Mistake #5: Reporting Old Debt in the Wrong Year
The "Date of Identifiable Event" in Box 1 determines which tax year to report the debt. If the date is December 2020 but you received the form in 2022, it belongs on your 2020 return (requiring an amended return if you already filed). Solution: Always check Box 1 to confirm the correct tax year.
Mistake #6: Missing Joint Debt Issues
If you and another person (like a spouse) were jointly liable for canceled debt, you might each receive a 1099-C showing the full amount. You don't both report the entire amount—each person reports their proportionate share based on benefit received and responsibility. Solution: Determine each person's share and report accordingly; keep documentation supporting your allocation.
What Happens After You File
IRS Matching Process
The IRS receives your Form 1099-C and compares it against what you reported on your tax return. If everything matches (or you properly explained an exclusion with Form 982), your return processes normally.
If There's a Discrepancy
If you didn't report canceled debt or the IRS believes you reported it incorrectly, you'll typically receive a CP2000 notice (Automated Underreporter Notice) several months to two years after filing. This notice proposes additional tax, penalties, and interest. You have the right to respond, explain your position, and provide documentation supporting an exclusion.
Audit Risk
Returns claiming canceled debt exclusions face slightly higher audit risk because the IRS wants to verify you legitimately qualified—especially for insolvency and principal residence exclusions. Keep thorough records proving your assets and liabilities at the cancellation date.
State Tax Implications
Remember that state tax treatment of canceled debt varies. Some states follow federal rules, while others don't allow the same exclusions. You may owe state income tax even if the debt was federally excluded. Check your state's specific rules.
Credit Report Impact
Canceled debt often appears on your credit report as "settled" or "charged off," potentially affecting your credit score for up to seven years. The tax consequences and credit consequences are separate issues.
Future Borrowing
Having reported canceled debt doesn't directly prevent future borrowing, but the underlying financial distress that led to cancellation may affect your creditworthiness for several years.
FAQs
1. I received Form 1099-C for a debt I'm still paying. What should I do?
Contact the creditor immediately. Sometimes creditors mistakenly file Form 1099-C while still attempting collection, or they file it when they sell your debt to a collection agency (which isn't a true cancellation). Request a corrected Form 1099-C showing zero canceled debt if the creditor acknowledges the error. If they refuse, document your ongoing payment history and include an explanation with your tax return. The IRS won't tax you on debt that wasn't actually canceled.
2. Can I exclude canceled credit card debt from income?
It depends. Personal credit card debt canceled outside bankruptcy usually isn't excludable unless you were insolvent immediately before cancellation. Calculate your total liabilities versus total assets at the cancellation moment using the Insolvency Worksheet in Publication 4681. If your debts exceeded your assets, you can exclude some or all of the canceled debt. Business credit card debt follows different rules.
3. My home was foreclosed in 2021. Do I have taxable income?
Maybe. First, determine if your mortgage was recourse (you're personally liable) or nonrecourse. For recourse mortgages, if the home's value was less than the loan balance and the lender forgave the difference, you may have cancellation of debt income—but the qualified principal residence indebtedness exclusion might apply for loans on your main home. For nonrecourse mortgages, you won't have cancellation of debt income, but you'll calculate gain or loss on the foreclosure itself. See Publication 4681 for detailed foreclosure reporting rules.
4. What's the difference between being insolvent and filing bankruptcy?
Insolvency means your total debts exceed your total assets at a specific moment—you calculate this yourself. Bankruptcy is a formal legal proceeding through court. Both provide exclusions for canceled debt, but bankruptcy's exclusion is broader (excludes all debt canceled in the bankruptcy case) while insolvency only excludes canceled debt up to the amount you were insolvent. You don't need to file bankruptcy to claim the insolvency exclusion.
5. I received Form 1099-C years after I thought the debt was resolved. Why?
Creditors file Form 1099-C based on "identifiable events." Sometimes several years pass between when you stopped paying and when an identifiable event occurs—like the statute of limitations finally expiring or the creditor officially writing off the debt. The form should show the identifiable event date in Box 1. You must report the canceled debt in the tax year of that event, which may require filing an amended return for a prior year.
6. Does canceled debt affect my tax refund?
If the canceled debt is taxable income and you didn't withhold or pay estimated taxes accounting for it, you'll owe additional tax—potentially reducing or eliminating a refund, or creating a balance due. If you properly exclude the debt using Form 982, it shouldn't create additional tax liability. The timing matters: canceled debt reported in 2021 affects your 2021 tax return filed in 2022.
7. What if my Form 1099-C shows a larger amount than was actually forgiven?
Box 2 of Form 1099-C should show only the unpaid principal, not accumulated interest, fees, or penalties (though Box 3 shows interest if included in Box 2). If the amount seems wrong, gather documentation showing payments you made and the actual debt balance when canceled. Contact the creditor for a corrected 1099-C. If they refuse, report the correct amount on your tax return and attach an explanation. You're responsible for reporting the accurate canceled debt amount, not blindly following an incorrect form.
Sources
Sources: All information based on official IRS publications including IRS Form 1099-C page, 2021 Instructions for Forms 1099-A and 1099-C, IRS Publication 4681 (2021), and IRS Topic 431.
