So, if a 1099-C appears in your mailbox, your creditor has forgiven the debt, and you shouldn't have to worry about debt collectors. But make sure you report the forgiven debt to the IRS. The IRS is good at tracking income tax returns that should include canceled debt as income. If you are flagged as receiving a 1099-C but do not include it on your tax return, you could face a tax bill plus penalties and interest.
There are some exceptions. If the debt was forgiven in bankruptcy, or if you were insolvent (owe more than you own in assets) at the time the debt was forgiven, you could qualify for an exemption. You would have to file IRS Form 982 with your tax return if 1 of the exemptions applies to you.
If you expect to file Form 982, you should seriously consider running it by a tax professional. The code is rarely clear, and I want you to make sure that you actually qualify for the exemption. You don't want to owe the IRS, ever. They are much less forgiving than regular creditors.
Because of the confusion that old debts cause, let me reiterate that just because a debt is charged off by your creditor does not mean that the debt is forgiven. Most creditors pursue old debts until they exhaust all their legal options. As long as the statute of limitations has not expired, it is likely you will be contacted by debt collectors. You will need to come up with a plan to pay what you owe, or you could end up in court.
Finally, keep copies of your 1099-C and your tax return just in case you need to show proof of your forgiven debt to an errant debt collector.
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