Only forgiven PRINCIPAL is subject to a 1099-C upon settlement or non payment – NO tax if you were insolvent

I see more and more 1099s not only after settlements, but because lenders chose to stop collecting.

  • If you settle accounts for less than the full balance, you might well get a 1099 from the creditor if the discount was for more than $600.
  • Many original creditors are sending out 1099s when the SOL expired or after a few years of inactivity.

You MAY have to pay income tax on the amount of PRINCIPAL forgiven, but NOT on forgiven interest and fees.

Debt buyers rarely send 1099s because they don’t know how much of the balance is interest / fees and how much is principal.

If the amount is significant, make sure that

1) you weren’t insolvent
2) interest and fees are NOT included in the 1099.

Make sure that the credit reporting is accurate!

Check the 1099 and your records, details are explained below.

Here are some IRS references:

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation (tax years 2007 through 2012)

The IRS guidelines for tax year 2012, Publication 4681

The IRS worksheet to determine whether you were insolvent just prior to the cancellation of debt.

And here are attorney Dan Edelman’s comments [please note that this commentary is from 2006, prior to the Mortgage Forgiveness Debt Relief Act]:


The Internal Revenue Code treats cancellation of debt as income under specified circumstances. 26 U.S.C. �6050P; 26 C.F.R. �1.6050P. The owner of a debt who cancels it must file an informational form 1099-C if the amount cancelled exceeds $600. Generally, cancellation of debt is income unless (a) there is a bona fide dispute concerning the debtor’s obligation to pay, (b) the debtor is insolvent, (c) the debt is discharged in bankruptcy. The amount that might constitute income is only the principal amount. On a credit card debt this is the purchases and cash advances. The failure to collect interest, finance charges, penalties, and fees is not income and has no tax consequence. See Debt Buyers’ Ass’n v. Snow, 06-101, 2006 U.S.Dist. LEXIS 6527 (D.D.C., Jan. 30, 2006). Because of this, the portion of the debt that consists of “principal” as opposed to “interest” is material, and falsely stating the amounts should violate 15 U.S.C. 1692e. Debt buyers traditionally have not obtained the requisite information from the owner of the debt to make an accurate report. See Debt Buyer’ Ass’n v. Snow, 06-101, 2006 U.S.Dist. LEXIS 6527 (D.D.C., Jan. 30, 2006). They are obligated to do so if it is available.

Receiving a 1099 does NOT necessarily mean that the creditor will stop collecting and you can even be SUED for the debt!

That’s what makes it really confusing. There has been quite a bit of litigation and here are a few cases:

DEBT BUYERS’ASS’N. v. Snow is a DC opinion frequently cited in subsequent litigation. The Debt Buyers Association sued Secretary of the Teasury Snow, seeking an exemption to the IRS requirement to send 1099s as debt buyers usually do not have the required info (amount of interest and fees) to prepare the 1099s accurately. Snow explains the 2006 RULES very well.

Amtrust Bank v. Fossett is a 2009 Arizona appeals court opinion regarding a lender’s suit after it issued a 1099 and it contains references to other states’ rulings. “We hold that while issuance of a Form 1099-C may be prima facie evidence of cancellation of a debt, the lender may rebut that evidence by showing that when it issued the form it did not intend to forgive the obligation.”

In re Zilka, 407 BR 684 – Bankr. Court, WD Pennsylvania 2009 is a Pennsylvania opinion regarding bankruptcy disbursements after the debtor received a large settlement to a creditor who had sent 1099s. The court ruled that the 1099s did NOT mean that the lender actually canceled the debts because it merely complied with the IRS regulations.

The regulations require creditors to send the 1099s after certain events (such as no payments, no collection efforts, etc. for certain amounts of time).

Snow suggests that creditors can include a statement indicating that they will continue to collect with the 1099. If they don’t do that, they might violate the FDCPA (if subject to it) because consumers would assume that they no longer owe after a debt is canceled. Box 6 of the 1099 is IMPORTANT! (see below)

Many of the 1099s I have seen actually DID include interest.

Some creditors used the balance around the time when the last payment was made and they didn’t include the fees and interest after that point. HOWEVER, they included previous interest and fees, which was added to the balance often for years and then also accrued interest. I’m not aware of litigation over interest and fees prior to the last payment and it may be worth a challenge if either the amount is significant OR you’re looking to get deletion of the entire account due to continued reporting of a past due balance.

According to some appeals court rulings, if a creditor gets paid AFTER they sent the 1099, they may just have to issue a CORRECTED 1099 with the correct amount canceled, such as $0. It appears that the courts ignore the WORK involved for consumers who actually paid tax on the amount forgiven and they then have to amend their tax returns (state and federal), which may require that they pay an accountant.

Credit reporting

Capital One in 2013: I have seen Capital One deduct the amount canceled from the total reported. They continued to report the INTEREST portion of the debt.

FIA (Bank of America) 2013: I’ve seen an account reported with the full amount.

What can LEGALLY be reported probably depends on the CODE for field Box 6 on the 1099, the “Identifiable Event Code:”

A Bankruptcy
B Other judicial debt relief
C Statute of limitations or expiration of deficiency period
D Foreclosure election
E Debt relief from probate or similar proceeding
F By agreement
G Decision or policy to discontinue collection
H Expiration of nonpayment testing period
I Other actual discharge before identifiable event

A client just received a 1099 from Chase with code G:

“G Decision or policy to discontinue collection”

However, Chase still reports the full amount on the credit reports (along with totally bogus RECENT 120+ late payments) and we disputed. I argue that credit reporting IS an attempt to collect as the past due balance lowers your credit rating and it likely has to be PAID to get a mortgage.

However, Code H clearly means that they can continue to collect.

“H Expiration of nonpayment testing period”

The creditor merely complied with the IRS rule.


1099s for canceled debts are a very complex subject and may result in consumer claims against creditors due to incorrect amounts, codes and credit reporting.

MANY consumers will NOT be liable for any tax as they are INSOLVENT.

Complete the IRS worksheet to determine whether you are insolvent:  IRS-Insolvency-p4681-opt.pdf

If you previously paid tax on a forgiven debt while you were insolvent, keep in mind that you may be able to AMEND your tax returns.

13 Responses to “Only forgiven PRINCIPAL is subject to a 1099-C upon settlement or non payment – NO tax if you were insolvent”

  1. I received a 1099c on a chase credit card after 3 years of non payment under box 6, code G.

    I am on disability. I do not need to file tax return. Therefore, because my forgiven 11,000 dollars do not mesh with the 17,000 which included interest, how do i get chase to take my name off the credit report with a balance of principal plus interest?

    I cannot seem to get a answer from anyone that makes sense. Am I just over it?

    I do not have to pay balance, or can Chase just resend the 1099c form with the whole credit (principal plus interest) forgivness?


    • Kathy,
      First of all, don’t mix credit reporting with tax liability — they’re NOT related.

      I am on disability. I do not need to file tax return.”

      Unfortunately, now that you got the 1099, you DO have to file a tax return. Because you can list all charged off debts as LIABILITIES, your liabilities likely exceed your assets and in that case, you’re insolvent.

      I have not personally researched this issue in the last couple of years, so the regulations may have changed. If you don’t file a tax return, the IRS could send you a bill for the tax owed, but they may or may not bother.

      For credit reporting, I’m not sure what Chase can legally report. I got so frustrated with credit reporting agencies and collectors doing whatever they want because my clients couldn’t afford attorneys, I’m no longer offering credit services other than for my old clients.

      I started a small organic farm in the high desert and it’s tough, but also a lot more fun.

      You COULD fight Chase over the incorrect 1099 C, but is it worth the aggravation and frustration?

  2. David Pannazzo

    In 2005 Two mortgages were taken to buy a home.
    After back to back hardships I became unable to pay the second, NationStar, being they would not work with me in any way.

    I received a 1099C from Nation Star to be filed with my taxes for the year 2014. Box number 6 was left blank with no code in it. Nationstar would not send out completed 1099C saying they are not required to fill in box 6.

    The 1099C was filed with my taxes whereas It was not considered “earned Income” due to the “mortgage forgiveness act.”

    I now received a letter from Ditech stating they own the debt asking payment be made in the full amount of $71, 000 and they have the lien on the property.

    Is it allowed the form be incompletely filled out, Nations star receive the tax credit for “charging it off” myself having to file it with my taxes and yet have another company try to collect on it stating they now have the lien on the house?

    • You have a very complicated situation.

      I’d have to do some SERIOUS research and look for RECENT case law and I would definitely dispute the account with Ditech, stating that NationStar sent the 1099. What state are you in?

      • David Pannazzo

        I’m in NY State. Bronx county specifically.

        I’ve sent an email to a Title search company explaining the situation and asking if they would be able to uncover a lien that may be in place by Nation Star / Ditech (formerly Green Tree.)

        I realize it’s complicated being no one had a clear answer add the lenders won’t reveal much.

        Nation Star on their website has the debt listed as “paid in full.” I’m sure that they would claim it’s by Ditech when they stored it.

  3. David Pannazzo

    Acquired it. (Not stored)

  4. Unfortunately I don’t know anything about NY state law.

    I’m in the middle of an appeal with junk debt buyer Midland Funding and one of the issues is that Midland “waived” interested charges that it later reported as owed to the credit bureaus. From the case law that I read in Arizona, the question is whether the consumer reasonably concluded that the amount was no longer owed.

    Since this is a LARGE amount, try to get some free info from NY consumer lawyers at

    Check the real estate / mortgage category and debt collection. I’m sure this is not the first and only mortgage that was sold after a 1099 was issued. Try to get SEVERAL opinions, not all of these attorneys know their stuff.

    Obviously ask how you should respond to the demand letter and see how much they would charge to represent you if Ditech starts foreclosure.

    If an attorney contacts them on your behalf, they might just drop it rather than face a court battle. However, you also need to get the LIEN reported as satisfied or you won’t be able to sell / refi.

  5. Also, try to get a WRITTEN opinion (email) from the lawyers as this is a complicated issue and talk is cheap.

    Please also update here, thanks!

  6. Irene kash


    • Irene kash

      I hae question reiceved 1099c maked settlement inbox 6 G in box 5 debtor was personally liable for repayment of the debt do I have to claim as income?

  7. Yes, unless you’re insolvent (liabilities exceed assets) or you filed for bankruptcy.

  8. Tina

    My dad died in Dec 2015. As executor, paid remaing bills and sold house in 2016. All bills paid except one for $16,000. Not enough money to pay. Contacted company regarding account. Told them my father died. Never heard back from them. Just received a 1099C box 6 checked with a G. Is this just reportable or is the amount taxable?

    • Sorry, I don’t understand the difference between “reportable” and “taxable.” Will you be filing a return for 2016 for you father’s estate? You should probably consult a CPA.

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