Last reviewed: 1 October 2026
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Canceled or settled debt and taxes: Form 1099-C and the insolvency exclusion
Under U.S. federal tax rules, the IRS says that, in general, if a debt is canceled, forgiven, or discharged for less than the amount owed, the canceled amount is taxable and is reported for the year the cancellation occurred.[1] Filers of Form 1099-C include banks, credit unions, federal agencies, and organizations whose significant business is lending money; they file when they cancel $600 or more after an identifiable event.[2] Whether or not you receive one, or the amount is under $600, canceled debt is generally still income unless an exception or exclusion applies.[1] Exclusions, including debt canceled in bankruptcy and, to the extent you were insolvent, debt canceled outside bankruptcy, are claimed on Form 982.[1][3] This page is general federal information, not tax advice.
What "canceled" means to the IRS
The IRS says a debt is canceled for the amount you no longer need to pay when it is forgiven or discharged for less than the full amount owed. Cancellation may occur if the creditor cannot collect or gives up on collecting. For secured debt, it can also occur through foreclosure, repossession, a voluntary transfer to the lender, abandonment, or a mortgage modification.[1] This page leaves secured-property events to IRS Publication 4681; see also foreclosure and deficiency judgments.
Form 1099-C
- What it shows: the amount canceled and the date of the identifiable event.[1][2] Box 1 is the date and Box 2 is the amount discharged.[2]
- Who files, and the $600 line: filers include banks, credit unions, federal agencies, and organizations whose significant trade or business is lending money, such as a finance or credit card company. A filer files for each debtor for whom it canceled a debt of $600 or more when an identifiable event has occurred. It must file regardless of whether you are required to report the debt as income.[2] The reverse also holds: whether or not you receive a 1099-C, or the amount is under $600, canceled debt is generally still income unless an exception or exclusion applies.[1]
- If it is wrong: the IRS says to contact the creditor if a 1099-C has incorrect information. Your responsibility to report the correct taxable amount stays with you whatever the form says.[1]
- If collection continues: the IRS says that if a creditor keeps trying to collect after you receive a 1099-C, the debt may not have been canceled, and you may not have canceled-debt income. It suggests verifying your situation with the creditor.[1]
The identifiable events behind a 1099-C
A debt is treated as canceled on the date of an identifiable event. The IRS instructions list these, each with a code in Box 6:[2]
| Code | Event, in plain words |
|---|---|
| A | A discharge in bankruptcy under Title 11. The instructions say a debt discharged in bankruptcy generally need not be reported unless the creditor knows from its books and records that it was incurred for business or investment purposes.[2] |
| B | A cancellation or extinguishment that makes the debt unenforceable in a receivership, foreclosure, or similar federal nonbankruptcy or state court proceeding.[2] |
| C | The statute of limitations for collecting expires. The instructions say this counts only when the debtor's affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired.[2] |
| D | The creditor elects foreclosure remedies that by law extinguish or bar its right to collect, such as a mortgage lender barred by local law from pursuing the debt after a power of sale.[2] |
| E | A cancellation or extinguishment that makes the debt unenforceable in a probate or similar proceeding.[2] |
| F | A discharge under an agreement between the creditor and the debtor to cancel the debt at less than full consideration, for example a short sale.[2] In our reading, a negotiated settlement for less than the balance owed fits this description. |
| G | A creditor's decision or defined policy to stop collection activity and cancel the debt. A written policy or an established business practice can count.[2] |
| H | Another actual discharge before one of the events above.[2] |
The statute-of-limitations row matters for old debts: a debt can pass the date after which a lawsuit is barred without that, by itself, being an identifiable event for 1099-C purposes. See the statute of limitations vs. the credit reporting period. A charge-off is an accounting step, not necessarily a cancellation; see charge-off vs. collection account.
Settled debt: where it fits
A settlement that reduces what you owe is a debt canceled for less than the full amount, so the IRS rule above is the starting point.[1] How settlement programs work, including the tax bill they can create, is covered in what to expect from debt settlement. Leaving a program is a separate question: quitting debt settlement.
Exceptions and exclusions the IRS lists
Some canceled debt is not counted as income. The IRS separates "exceptions", which do not require reducing tax attributes, from "exclusions", which generally do.[1]
- Exclusions: debt canceled in a Title 11 bankruptcy case; debt canceled to the extent you were insolvent; qualified farm indebtedness; qualified real property business indebtedness; and qualified principal residence indebtedness discharged before 1 January 2026, or under an arrangement entered into and evidenced in writing before that date.[1]
- Exceptions: include amounts canceled as gifts or inheritances, certain student loan discharges, and a qualified purchase price reduction given by a seller of property to the buyer, among others.[1] Publication 4681 has the detail.[4]
- Credit card debt: Publication 4681 notes that if a nonbusiness credit card debt was canceled, you may be able to exclude it if the cancellation occurred in a Title 11 bankruptcy case or you were insolvent immediately before it.[4]
The insolvency exclusion
Publication 4681 says you were insolvent immediately before a cancellation to the extent your total liabilities were more than the fair market value of all your assets immediately before it.[4] Three points from the IRS:
- Assets include everything you own, including assets that serve as collateral for debt and exempt assets, such as your interest in a pension plan and the value of a retirement account.[4]
- Liabilities include the entire amount of recourse debt, with special rules for nonrecourse debt.[4]
- The amount excluded cannot exceed the amount by which you were insolvent, and other exclusions are applied before this one. It does not apply to debt canceled in a Title 11 bankruptcy case.[4][5]
To claim it, you attach Form 982 to your federal return and check the box for discharge of indebtedness to the extent insolvent (line 1b); you generally must also reduce certain tax attributes, such as credits, loss carryovers, and the basis of assets, by the amount excluded.[1][3][4] Publication 4681 includes an Insolvency Worksheet for the calculation. We do not work through a calculation here, because the result depends on your own assets and debts at the moment of cancellation.
What you can check or do next
- Compare the amount and date on any 1099-C with your own records of the settlement or cancellation.[1][2]
- If the form looks wrong, contact the creditor, and keep a copy of what you send.[1]
- Find out whether the creditor is still collecting; the IRS says that may mean the debt was not canceled.[1]
- Read IRS Topic 431 and Publication 4681 for your situation, and consider asking a tax professional before you file, particularly if you think the insolvency exclusion may apply.[1][4]
What this page does not cover
It covers federal income tax on canceled consumer debt in general terms. It does not cover state income tax, business debt, secured-property foreclosures or repossessions in detail, or whether any particular debt is canceled or taxable for you. It is general information, not tax or legal advice.
When we will update this page
We revisit it when the IRS revises Topic 431, Publication 4681, Form 982, or the Form 1099-C instructions, or when Congress changes 26 U.S.C. § 108. Sources last read 1 October 2026; Publication 4681 is the edition for 2025 returns.
What you can do next
- Find a company — see which specific US companies we checked and what we could verify.
- How we check — the rules and sources behind each result.
- More credit help guides
- Report an error on this page or in a result.