Will I get penalized if I do not add this 1099-C form to my taxes this year? will it effect the outcome of my return?

That is income and must reported. The IRS has a copy of that form and will expect it on your return. 

what I'm not understanding is how is that my income when it's a car loan when I haven't paid anything on that car because it was stolen. i had the car for a couple of months then it got stolen. how am I the one having to pay or the one being somewhat punished for someone else wanting my car?

I can only tell you what is the tax law.