When the economy is in a bad place and people have a lot of debt, they sometimes go through a process to have that debt cancelled. What most people do not understand is that reduction in debt is often taxable as income and just because the debt company may have said the debt was paid, it may not have completely forgiven the debt and you may feel the repercussions later.
What Is Cancelled Debt
Cancelled debt is what companies refer to as debt that was unpaid on a loan per an agreement between the debtor and the company. For example, perhaps you had a credit card debt of over $10,000. You lost your job or were hurt and cannot work for a period of time, thus you cannot pay your bills. You and the credit card company work out an agreement that you pay 60 percent of the remaining debt, which would be about $6,000. The $4,000 is a cancelled debt.
Paperwork
It's all in the wording in the paperwork you receive and sign when you agree to a cancelled debt. When you receive a cancellation of debt notice, you would think that cancel means cancel, never to see, or ask for, again. Unfortunately, this is not the case. When you are thinking about cancelling a debt due to financial difficulties, read the fine print carefully on any paperwork the company sends you. You may even want to ask a representative of the company if the company can or will come after you for the rest of the debt. Some companies may also sell the remaining debt to a third party to collect the debt. However, most companies will not try to get more money from you after sending a 1099-C. This company was able to collect a tax deduction itself because of the loss of money.
Taxes
When you have cancelled debt, you will most likely be required to include the cancelled amount as income on your taxes. The company will send you and the IRS a 1099-C, which you should include in the appropriate box on your tax forms. Just because you received this information from the creditor and you claimed it as you should on your taxes does not mean that the creditor will not come after you looking for the remaining balance.
Repayment
If you have a cancelled debt and the creditor asks for more money after you already paid the agreed upon amount and after you reported it on your taxes, you can have your taxes changed to reflect this. Check with the IRS to get the necessary paperwork or consult an accountant to help you make the adjustments. You may be able to get money back from the cancelled debt income.
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