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What is a 1099-C?

A 1099-C is a form that a creditor is required to send out to you if a debt you owed to that creditor was forgiven.  The general rule is that you have to pay federal (not state and not local) income tax on debts over $600 that are forgiven.  There are several exceptions to that rule, but the one used most commonly by consumers is "insolvency".

What is insolvency?

A simple definition of insolvency is when your debts are greater than the value of all of your assets.  This includes assets that you may not have access to like a 401(k) or equity in a home you can't sell.  The IRS has a worksheet to help you determine if you are insolvent:

NOTE:  The mortgage debt forgiveness act was NOT extended into 2019 as of this writing.  What this means is that if your home is foreclosed on or if you do a deed in lieu of foreclosure or a short sale you may have to PAY INCOME TAX on the mortgage debt that was forgiven.  This could be a huge sum of money.  The chances of getting a 1099-C in Pennsylvania for a mortgage that was foreclosed on is slim.  But getting one for a deed in lieu or short sale is almost guaranteed.  If you weren't insolvent at the time of the short sale or deed in lieu there is a way to get out of having to pay income tax on the debt that was forgiven: bankruptcy - and it needs to be filed in the same tax year that the debt was forgiven to be safe.

Bankruptcy and the Presumption of Insolvency

When you file bankruptcy, the IRS just assumes you are insolvent - even if technically looking at just the numbers you aren't.  So if your debts are not greater than your assets but you file bankruptcy, you are insolvent.  Debts discharged in bankruptcy are not "forgiven"; they are discharged.  The creditor isn't agreeing not to come after you for a debt - the bankruptcy court is forcing that creditor to not come after you for a debt.  YOU DO NOT PAY INCOME TAX ON DEBTS THAT ARE DISCHARGED EVEN IF YOU GET A 1099-C.  The creditor may send you a 1099-C but you just need to let the IRS know that you filed bankruptcy - because remember the creditor sends a copy of the 1099-C to the IRS too.  So if you get a 1099-C for a debt that was discharged in your bankruptcy - or if you settled a debt prior to filing bankruptcy and then filed bankruptcy that same tax year - you need to provide your bankruptcy information to the IRS when you file your tax return. If you have someone prepare your tax return for you make sure you let that person know you filed bankruptcy.  If that tax preparer doesn't seem to understand that bankruptcy alleviates your responsibility to pay that tax, get another tax preparer.