You Might Have To Pay Taxes On That Canceled Credit Card Debt

That credit card debt you had was canceled or forgiven — yay! But you might have to pay the Internal Revenue Service taxes on it anyway, so — boo. You’ll find out you owe money when a 1099-C tax form comes in the mail from your lender, and probably not before then.

USA Today says even canceled or forgiven debt is considered taxable income. The IRS says around 6.4 million of those stinky 1099-C forms will be sent in 2012, way up from 3.9 million in 2010.

The uptick in 1099-Cs probably comes from the rise in credit card defaults during tough economic times, as the report says the six largest credit card companies wrote off more than $75 million in uncollectible balances in 2009 and 2010.

So what do you do if you receive a 1099-C? You’ll have to pay up, unless you can prove that the debt was discharged in bankruptcy or that you were insolvent when the debt was canceled.

Even more fun? You might get a form that’s decades old, as one woman experienced. She no longer has the paperwork from the early 1990s to prove that the debt was ever discharged, and the financial institution she was involved with isn’t helping her out with any information.

One more nugget of negative news around these nefarious 1099-Cs is that many contain errors, according to one taxpayer advocate.

Treasury regulations encourage financial institutions to issue 1099-Cs for debts if they haven’t tried to collect them in at least 36 months, even if the debts haven’t been forgiven, she says. In other cases, taxpayers have received duplicate 1099-Cs for the same debt, she says.

Canceled credit card debt comes back to haunt taxpayers [USA Today]


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  1. Blueskylaw says:

    1099-C? What 1099-C? I never received a 1099-C in the
    mail. It must have gotten lost and just wasn’t meant to be.

    • az123 says:

      Yes, try that… not like they don’t electronically send it to the IRS and then the computers at the IRS will not check your tax return for reporting income from a 1099-C…. Or perhaps you just really enjoy getting audited and having to pay interest and penalties on late taxes.

      • BobOki says:

        It’s not an audit. What they do is they DON’T send you the 1099-C. They just report it as a write-off and the IRS sends you a freaking collection notice about 4 months later with a 30 day payoff time.
        There was no phone number you could call, all you could do was fill out paperwork and mail it back in…. oh did that take over 30 days? hey late fee!

        FU Salle Mae for doing it to me on a debt I FULLY paid off…. two years after it had been paid off.

  2. Bsamm09 says:

    Makes sense: You buy $10,000 worth of goods and pay $2,500 and CC forgives debt of $7,500, you made $7,500.

    • dush says:

      If there was never any interest paid it would make sense.

      • StarKillerX says:

        Actually the interest is meaningless, since that would be paid even if you paid the debt off so not having to pay the debt has actually increased your “earnings,”

      • Bsamm09 says:

        What do you think interest is? Interest is the cost of money not what the money buys.

        • OutPastPluto says:

          The credit card interest is likely a mathematical fiction. In all likelihood, the only “benefit” you are receiving is the bank in question finally realizing that they can’t take advantage of you anymore.

          It’s not a “gain”, it’s a smaller loss.

          The whole thing is likely a result of a level of usury that shouldn’t even be legal.

          • Bsamm09 says:

            What? So who do find to loan you money for nothing? Please let me know. I will borrow every dime they will allow me to.

            • dush says:

              So if I refinance my mortgage at a lower rate and end up paying less interest in the long run I should get taxed on that difference like I just got some income? That would be absurd.

              • Bsamm09 says:

                I agree and never said anything about interest in that regard. In fact, I said interest is the cost of money. Therefore, it has no bearing on the COD income amount.

                Maybe I misread your statement: “If there was never any interest paid it would make sense.” That has no bearing on the issue at hand.

                You purchase something for $10,000 and pay $2,500….ahhhhh….that’s where the disconnect may be. I mean’t on the principal not aggregate. I don’t care if they paid $50,000 in interest and $2,500 in principal for a total payment of $52,500, they owe $7,500 in COD income.

                Sorry for the confusion. I look at interest as a separate item.

                • dush says:

                  oh right, I see what you’re saying. I was just thinking of credit card payments being mostly interest.
                  If you have someone making minimum payments and then defaulting on the debt after a few years they’ve probably paid more than what they originally purchased but still have a large outstanding debt because of the high interest. That amount of money which what written off or “forgivin” I don’t think should be taxed as income.
                  Now if they haven’t actually paid back more than they purchased then yeah, they shouldn’t get that stuff for free.

    • Velvet Jones says:

      If I go in to a car dealer and negotiate $5000 off the price do I know owe the IRS on $5000 of “income”?

      • Bsamm09 says:

        Not the same thing or even close. I’ll make this real easy for you.

        Day 1: You have $0 to your name.
        Day 2: You get a CC with a $10,000 limit
        Day 3: You take a cash advance for $10,000
        Day 4: CC company cancels your debt (You do not owe them anymore)

        What would you call that? You now have $10,000 more than you did on day one. What would you call that and try to tell me how your example nets you more money than you started with.

        (Don’t say it was a gift because there was no donative intent.)

  3. Cat says:

    Pay for the stuff you buy, and you’ll never need to see astinky 1099-C form.

  4. bender123 says:

    “The uptick in 1099-Cs probably comes from the rise in credit card defaults during tough economic times, as the report says the six largest credit card companies wrote off more than $75 million in uncollectible balances in 2009 and 2010.”

    Wow…a whole $75 million? How generous of them to pass on so much to the people they fooled.

    • consumer420 says:

      Yea $75 million would be absurdly low. Appears to just be a typo though: The article says it is actually $75 billion.

    • StarKillerX says:

      Huh? Fooled? Do you mean those poor people the bank forced to run up charges they couldn’t afford on their credit cards?

      • bender123 says:

        In the old bank world, these people would never have received an account and jacking fees and rates to 30% on people that were already stressed doesnt help, either.

        • Doubting thomas says:

          and then you would be here calling them racists or classists for not extending that credit. Much like Clinton and Sharpton did with the housing/mortgage industry.

          • StarKillerX says:

            Exactly, and I actually remember early in CSPAN’s history watching hearings on exactly that issue and hearing politicians line up to complain that the banks weren’t giving credit cards to those who couldn’t afford to pay the money back.

    • dullard says:

      What about living within your means?

      I have a great idea. Let’s all go buy a $2 million dollar house. After about six months we’ll tell the bank we can’t afford the house and ask them to lower the principal. Sure, we may have to pay taxes on the amount of principal forgiven by the bank, but we get a $2 million house for a lot less, maybe half. Of course we may not be able to afford the house even with the reduced principal, but we get to live there for quite some time until the bank forecloses.

      After the foreclosure we can blame the bank for our troubles. They should never have tricked us into buying the house in the first place.

      What happened to personal responsibility?

  5. Queep misses WarOtter :( says:

    I’m seeing a disturbing trend here, tax posts that do not feature Tax Cat.

  6. Lyn Torden says:

    You also do not have to pay up if the debt is not yours. An estimated 15% to 20% of those accounts are mixups that identify the wrong person, usually because they have insufficient information about the real debtor to correctly identify who owes.

  7. Nigerian prince looking for business partner says:

    I thought you always had to pay taxes on canceled debt.

    Years ago, the state of Pennsylvania forgave student loan debt for any resident serving in a combat zone. I can’t remember the exact amount but for me, it worked out to be around $3,500. A 1099 was cut and that forgiveness was definitely taxable.

  8. Warren - aka The Piddler on the Roof says:

    Coming soon: the 1099-F.

    The Fart Tax is based on what you eat and how much methane you release into the atmosphere each year. Yes, there’s a tax for that. Who do think will pay the EPA for all those readings they have to take?

  9. missy070203 says:

    ahhhh the old forgiven debt is like income snag….. creepy IRS………

    • u1itn0w2day says:

      Forgiven debt to the credit card user but a tax write off to the lender. See that’s why they are taxing that unpaid debt so the IRS can balance their books. It all evens out, no fuss.

  10. StarKillerX says:

    So, would this be taxed as capital gains or regular income?

    • H3ion says:

      Ordinary income. There’s no capital asset involved. But if you were insolvent (not necessarily in bankruptcy) you may not have to pay tax on the forgiveness of indebtedness income. This is one for a professional tax adviser, not H&R Block.

  11. luusyphre says:

    Only something like 1% of people making

  12. Hoss says:

    Let’s send one to Mitt Romney and see if this pulls his gross income above the poverty line

  13. John from Huntersville says:

    Lots of folks settle with the IRS for back taxes that they owe. Do they receive a 1099C from the IRS for the reduced IRS debt?

  14. dolemite says:

    “We’ve heard you have a lot of trouble paying your bills. So here’s a new bill, that you totally weren’t expecting!”

    • pythonspam says:

      “We’ve heard you have a lot of trouble paying your bills. So because your debtee wrote off the $X owed, here’s a new bill for a fraction of $X (based on your current tax bracket), that you totally weren’t expecting!”
      There, I fixed it for you.

      Is debt-writedown true income? Not really.
      Just as there are tax consequences for short-sale and mortgage writedowns even though the homeowner never “made any money”.

  15. lovemypets00 - You'll need to forgive me, my social filter has cracked. says:

    “You’ll have to pay up unless you can prove that you were insolvent when the debt was canceled”

    So – could you show the IRS bank statements with like $5 available at the time? What if you just withdrew all your money in the months before, stuffed it under your mattress, and then got the debt canceled?

    I know I’m thick about these things, but how does this part actually work?

  16. ScarletAnn says:

    What is not mentioned in this article is that many of these 1099-Cs are being sent out by collection companies that purchased the debt for pennies on the dollar.
    Google “got a 1099C from a collection agency” and you’ll see lots of examples. Asset Acceptance is one company that’s been sending thousands out.

    This practice is a fraud both upon the government and people who receive these 1099Cs.
    You can’t forgive a $10,000 and claim a $10,000 loss if you only paid $500 for the debt in the first place.

    Anyone who get’s one of these needs to fight like hell, challenge the validity of the 1099-C, and let the IRS know it’s a fraud.

    • RandomHookup says:

      While I won’t assume collection agencies are above board, isn’t this what they are supposed to do if you settle the debt? They aren’t necessarily claiming that the transaction cost them the forgiven amount…just that the law requires they document the amount of any forgiven debt.

      • Bsamm09 says:

        Correct. If this is how they make their money it is their “inventory” for lack of a better term. They will hold it on their books at purchase price unless it becomes impaired further but will never write off more than they paid.

        When they decide to not pursue it any further, they will issue a 1099-C for the total amount. If the debt is transferable why wouldn’t they? Just because someone else bought it doesn’t mean you aren’t liable for the whole amount.

  17. areaman says:

    I see a story in the future…

    IRS has hard time collecting taxes from people who don’t pay their credit cards.

    • u1itn0w2day says:

      I don’t think there’s a statue of limitations on unpaid taxes for a particular year so if it was already determined/ the IRS informed of settled debt the payment plan ordered by a judge could have someone paying for the next decade.

  18. AngryK9 says:

    I thought that it was standard procedure anytime your had a debt that was simply forgiven, to pay taxes on it, as it is considered “income”

  19. Debbie says:

    Income is income. Obviously taxable.

  20. Happy Dad says:

    Just how is this news? This common knowledge.

  21. kbsparky says:

    I don’t understand how anything from the early 1990’s (20 years ago?) would be taxable today. There is something called the statute of limitations, and that should apply in cases like this …

  22. ryoko says:

    Now what if this happens to a debt you dispute? For example you and a creditor argue over it for a bit, then they just charge it off. If they file this form, are you stuck? I don’t see disputing with the irs to be pleasant.

  23. nearly_blind says:

    I hate to defend the IRS, but the reason for these type of rules is that they close what would be a big loophole that would allow tax deductions/subsidies for gifts.
    For example without this rule e,g: entity (person or company) A wants to give B $4K as a gift. He instead “loans” person B 4K, then latter foregives the debt. Entity A can then can claim a 4K capital loss on his taxes. This would reduce person A’s tax bill by his marginal tax rate, e.g. 25%, so the gift only cost him 3K and the goverment , in effect, chipped in 1K.

  24. kgb says:

    I got to pay taxes on a $1000 gift card I won last year. It wasn’t much and didn’t cost me out of pocket, but still seems like a lot of paperwork for such a little amount.