If a creditor “forgives” or cancels over $600 worth of debt, they are supposed to report it to the IRS as income to the “forgiven” party. The forgiveness occurs when a creditor gives up on trying to collect on a debt, as in a non-judicial foreclose or other situations where the lender doesn’t think they can collect.

Normally, the amount of cancelled debt in the 1099-C counts as income. If you borrowed $1000 and never have to pay it back, it is like having received $1000 of income. The most common circumstances where this does applies is if the debt was discharged as part of a bankruptcy or a person was insolvent at the time of the cancellation (more debts than assets).

If you got a 1099-C and the exemptions to income apply, your tax person needs to submit a Form 982 with your taxes. If you owe or paid taxes in prior years for 1099C income which the income exemption applies, go back and amend your returns.

For a more indepth article, see David Axinn’s Cancellation of Debt Income