What does a Form 1099-C mean?

When a taxpayer is unable to pay all of a debt and the creditor cancels the unpaid part, the amount of the canceled debt is generally treated as income to the taxpayer under federal tax law. Unfortunately, this is what happened to you.  Credit card companies and car loan companies, among others, also do the same thing.  In fact, each year creditors issue more than 1,000,000 Form 1099-C’s to borrowers.  The good news is that this canceled debt is not always income.  However, the tax treatment of canceled debts is extremely complex.  If, e.g., the creditor incorrectly values the property, then the amount of reported canceled debt is wrong.  Also, if the debtor is insolvent, this can greatly affect the amount of canceled debt that is taxable.  Thus, a thorough analysis of your particular situation is necessary by a competent professional.