Creditors are sending out IRS Form 1099-C seemingly more than ever these days when a debt is cancelled (short sale, credit card settlement, etc.) or sometimes when discharged in bankruptcy. The reason people receive these forms is that the IRS treats forgiven debts as income based on the theory that someone could be paid for working by having debt forgiven instead of being paid wages. In theory, if no 1099-C was issued, someone could avoid paying income tax on the money.
Generally, this is not a huge problem. If you have received a 1099-C, you probably should file IRS Form 982. If the debt was forgiven in bankruptcy, or if you were insolvent at the time the 1099-C was issued, your tax liability goes away.
As always, if you are considering debt settlement programs, it is wise to consult with a bankruptcy attorney to understand what tax implications you could face.
