1.4.3 Cancellation of Debt and Taxes
In some cases, consumers may be able to negotiate to reduce or eliminate an outstanding debt. Creditors and debt buyers that cancel or forgive a debt (or portion of a debt) worth at least $600 must file an information Form 1099-C with the Internal Revenue Service by March 31 of the following year, and must also send a copy to the consumer.244 The principal of a cancelled or forgiven debt may be considered taxable income to the consumer by the IRS, with a number of important exceptions, including the dispute of the debt, the debtor’s insolvency, or discharge in bankruptcy.245 This tax liability has become a big issue for homeowners who are under water and is discussed in detail in National Consumer Law Center, Foreclosures and Mortgage Servicing § 12.6 (5th ed. 2014), updated at www.nclc.org/library.
244 26 C.F.R. § 1.6050P-1(a).
245 Internal Revenue Code, 26 U.S.C. §§ 61(a)(12), 108. See National Consumer Law Center, Consumer Bankruptcy Law and Practice § 22.214.171.124 (11th ed. 2016), updated at www.nclc.org/library (litigation tax consequences for prevailing clients).