If a debt you owe is forgiven by the creditor, or you settle the debt for less than the full amount, the canceled portion is taxable income to you. However, there are exceptions and exclusions.
Canceled Debt that Qualifies for Exception to Resulting in Gross Income:
- Amounts specifically excluded from income by law such as gifts or bequests
- Cancellation of certain qualified student loans
- Canceled debt that if paid by a cash basis taxpayer is otherwise deductible
- A qualified purchase price reduction given by a seller
Canceled Debt that Qualifies for Exclusion from Gross Income:
- Cancellation of qualified principal residence indebtedness
- Debt canceled in a Title 11 bankruptcy case (Chapters 7, 11, 12, and 13)
- Debt canceled due to insolvency
- Cancellation of qualified farm indebtedness
- Cancellation of qualified real property business indebtedness (other than C corporations)
Banks, other financial institutions, and certain government agencies generally must report debt discharges (partial or complete) on Form 1099-C, Cancellation of Debt, if the discharge is $600 or more.