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: