How Wiping Out Debt Affects Your Taxes

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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