In most situations, if you receive a Form 1099-C from a lender after negotiating a debt cancellation with them, you'll have to report the amount on that form to the Internal Revenue Service as taxable income. However, there are a few exceptions:
- Debt discharged in a Title 11 bankruptcy (including chapters 7, 11, and 13).
- Canceled debt on qualified farms and real business property.
- Forgiven debt on a qualified principal residence if the forgiveness arrangement was entered into and in writing on or after January 1, 2007, and before January 1, 2021 (aka mortgage forgiveness debt relief).
- Debt canceled due to insolvency.
- To qualify, you must demonstrate that your total debt exceeded the fair market value of all of your assets immediately before the cancelation occurred.
- Use the Insolvency Worksheet in IRS Publication 4681 to figure out if you were insolvent at the time of the debt cancelation.
If taxable, you'll need to amend Federal and state. However, Form 1040X Amended U.S. Individual Income Tax Return won't be available before 02/14/2024.