A creditor that agrees to charge-off a debt may help a debtor overcome a financial hardship. However, if a lender forgives a debt, it must report the amount written off as income to the debtor. The debtor will receive a 1099-C statement from the lender that must be reported as income on his or her tax return.
Limited exceptions to the Cancellation of Debt:
- The debtor files for bankruptcy relief
- The debtor is insolvent
- Home mortgage debt (excludes credit lines except under certain circumstances)
- Deductible interest for the loan had you paid it
- Seller-financed debt
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