Why did a debt collector send me a 1099-C?

Some consumers are surprised to receive a 1099 from a lender or debt collector they dealt with in the last year, counting income to the consumer for debt forgiveness. The amount on Form 1099-C states the income "derived" from the forgiveness or settlement (for less than the full value) of a debt. Because the lender wrote off a debt (or a portion of a debt) it believed it was owed, it has the right (but not necessarily the obligation) to charge the income to you. Here are some exceptions:

  • A lender can't send a 1099-C for debt discharged in bankruptcy. If a debt was discharged in bankruptcy, the lender can't issue a 1099-C for debt forgiveness. However, let's say a debt was settled in January of 2010, and then you filed bankruptcy in February--then the debt forgiveness would be income.

  • You were "insolvent" when the debt was forgiven. The insolvency exception is a powerful tool for many people. If, on the day before the debt was settled or forgiven, all your assets (including your retirement accounts) were less than your total debts (including your mortgage)--then you don't have to count a 1099-C as income. File IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness

  • The debt is disputed and the lender can't prove you owed it. If you don't owe the debt and the lender can't prove it's legit. you may be able to contest a 1099-C. Contact a tax attorney for help.