Times can get tough. If you find yourself in a difficult situation when it comes to credit card debt, you may be able to make an arrangement with card companies to pay a fraction of the debt owed. The remaining portion of the debt is considered canceled debt or “forgiven debt.”
When this occurs, the company will send you Form 1099-C, Cancellation of Debt. You need to be aware that there may be tax consequences associated with the canceled debt.
In general, canceled debt is considered taxable income; however, there are some exceptions. If you receive a Form 1099-C but the creditor is still trying to collect the debt, then the debt has not been canceled and you do not have taxable cancellation of debt income.