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Gary Bode, CPA is a Master's Degreed, nation wide accountant offering tax and business services. Member of AICPA and NCACPA. Our virtual office provides excellent service to long distance and international clients. Call (910) 399-2705 for a free phone consult.

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I had a 1099-C for about $135,000. My husband didn't have any withholding on Social Security. His employer couldn't withhold due to incompetence. I felt utter dread wash over me. Memories of owing the IRS before were constantly on my mind. I called a local CPA. Besides being clueless, he wanted to charge me for every question I had about insolvency. I looked on line and found little hope of the countless stories of permanently disabled people like myself getting their student loans forgiven only to be asked to pay taxes on it as if it were income.
Somewhere, somehow, I find an article by Gary Bode. I bookmarked it for when it's time to do the actual taxes. With his excellent help in how to do all of this out of a virtual office I get my part of the work done. My questions got answered, for free. I give a retainer, do what I said I did and wait. I hear from Gary. I go into shock! How can this be? Not only do I not owe on the 135,000....Gary itemizes and after paying what was almost nothing in taxes we get $950.00 back! No more hubby doing the taxes online! I will use Gary Bode as long as he will agree to work with me!
It was so easy, no worries, but professional and top notch. I know I have thanked you Gary but I am so grateful. Thank you ever so much again!

Carla Bray

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Insolvency CPA discusses tax problems with Credit Card Cancelled of Debt | federal tax form 1099-C, Cancellation of Debt, and Form 982, Reduction of Tax Attributes

Insolvency CPAs see tax problems with clients who negotiated credit card debt cancellation. But some new clients don’t realize that cancelled credit card debt becomes taxable income. So I’ll touch on four main issues:

  • Dealing with the credit card companies.
  • Tax problems arising from cancelled debt, including federal tax forms 1099-C, Cancellation of Debt and 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).
  • Cash flow planning.
  • Cancelled debt strategies

Dealing with Credit Card Companies

I don’t deal with credit card companies unless there’s a tax issue involved. See the tax strategy below.

Here’s few issues cancelled credit card debt clients have shared with me over the years.

  • Stop paying the credit card companies. It can take several months of non-payment for them to get serious about negotiating.
  • Prepare for months of disheartening phone calls. These include threats to sue.
  • Continually mention you can’t pay.
  • Document every contact.
  • Some credit card negotiators say never admit the debt is yours.
  • Offer a cash settlement if possible, usually at the end of the fourth or fifth month.
  • Never give them additional information.
  • Mention potential bankruptcy. Do your homework on what that mean to the credit card company. If they’ll get $15,000 through bankruptcy, an offer of $18,000 now seems attractive.

Tax problems arising from cancelled debt including federal tax forms 1099-C, Cancellation of Debt, and 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)

Your credit score will plummet. You essentially have all the post settlement credit consequences as going bankrupt.

“Some folks don’t realize cancelled credit card debt incurs tax problems.”
– Gary Bode, cancelled debt CPA

Eventually you’ll receive federal tax Form 1099-C. The amount of cancelled credit card debt appears in Box 2. Check that number carefully. At this point you’ll owe tax on the amount in Box 2. I know that seems unfair. I ballpark the tax due at 25-30% of 1099-C’s Box 2. So $10,000 of debt cancellation can mean $2,500-3,000 of tax liability. Ouch.

But some of that cancelled credit card debt from Form 1099-C might be excluded from taxable income, by using federal tax Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). The name alone scares folks. But the Insolvency provision of Form 982 is the only way to exclude cancelled credit card debt from taxable income. Insolvency for IRS purposes doesn’t mean bankruptcy.

Cash Flow with Credit Card Cancellation of Debt

  •  Generally the credit card companies require a cash settlement. But I hear they might take that in installment payments.
  • You’ll have an IRS tax problem that might require payment of 25-30% on the amount listed in 1099-Cs Box 2.
  • You may have State taxes due from cancelled credit card debt.

Tax Strategy for Cancelled Credit Card Debt

Have as few assets as possible when finalizing the credit card cancelled debt settlement. Why? Being insolvent by the IRS definition can avoid cancelled credit card becoming taxable income on Form 982.

 I’m an Insolvency CPA who deals with all types of cancelled debt from federal tax Form 1099-C and Form 982. Our virtual office allows us to serve you regardless of location. Call for a free phone consult. (910) 399 2705.

Here’s a link that might help.

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31 comments to Insolvency CPA discusses tax problems with Credit Card Cancelled of Debt | federal tax form 1099-C, Cancellation of Debt, and Form 982, Reduction of Tax Attributes

  • Tim Randall

    IRS says I owe them for a canceled debt of my ex-wifes. I have never received any form 1099-c, nor any documentation regarding debt from credit company. I have called credit company and requested documentation from them, but was told they couldn’t send me anything since I claim to not owe the debt and they show nothing in regards to me in their system. So now what do I do? Do I just file for the insolvency? I don’t own anything of value, am currently unemployed and about to be homeless.

    • Well Tim, if there are no other pending cancelled debt tax problems, and if you can completely exclude the cancelled debt via federal tax Form 982 without consequences from the tax attributes, I’d just do that. However if there are consequences I’d fight that. We’ve challenged a case similar to yours and won. Hope that helps.

  • Jerry Miller

    How does it work where you have deducted business expenses charged on a creditcard and then file bankruptcy? Are the expenses still deductable?

    • Hi Jerry: Lots of folks pay business expenses with a personal credit card. I suggest documenting everything. So I don’t see any problem here unless you reconstruct expenses after the bankruptcy. Proactive is best. Of course talk to your bankruptcy attorney.

      • Jerry Miller

        I understand that it is normally deducted but that is assuming the credit card bill is eventually paid off. My question concerns where the debt is discharged in bankruptcy. Do the “tax attribution” rules on debt forgiveness come into play thus making the expenses non-deductable since the expenses are never paid.


  • Jerry Miller

    How does it work where you deduct business expenses charged on a credit card and then file bankruptcy and not payoff the credit card?

  • marianne

    I filed chap 7 for credit card debts. My lawyer told me that I shouldn’t be getting any 1099 forms. Do I still do a 982 form? 2013 taxes.

  • Therese

    I received a 1099c from Chase for discharged credit card debt. The credit card was in my name alone. I have been unemployed for several years. I am married and file a joint tax return. Can I personally claim insolvency?

    • Hi Therese. I think your asking if it’s better to file separate tax returns instead of a joint return in hopes of excluding more discharged credit card debt? Well that depends on the State. CPAs seldom recommend filing separate. However with cancelled debt I always prepare separate returns (when possible) and a joint return to see what works best for the client. Hope that helps.

  • Harris

    “I received a 1099c from Chase for discharged credit card debt. The credit card was in my name alone. I have been unemployed for several years. I am married and file a joint tax return. Can I personally claim insolvency?”

    I am in the same situation and live in a common law state. The house is in my spouse’s name as well as the car, etc. All of the checking and savings accounts are in my spouse’s name as that is who the money was earned by and the discharged debt is a result of my actions.

    I am literally insolvent and but cannot have an additional 25K in income added to spouse’s w2 as that will cause a refund to turn into a big payment situation.

    To file separate causes a HUGE payment situation on my spouse’s return where it would normally be a refund.


    • Hi Jay. Well I’d suggest seeing what the result of a joint return would be. Maybe the Form 1099-C, Cancellation of Debt, and Form 982, Reduction of Tax Attributes, solves your problem If not, then start looking for other angles. There are ways to perhaps “protect” your spouse from your tax consequence even if filing jointly. Hope that helps.

  • Jacob

    Hi Gary
    Maybe I missed it in reading the list, I have 2 1099-c for credit cards rounding up $10K
    401k through work with a $2k 5 year loan on it paying back monthly
    About %30k in student loans in repayment Paying child support,

    10 year old car, in an apartment no other assets using the 982 will the student loans tip the scale to my favor can the support (auto garnished) be counted? filing single Divorced a few years ago

  • Jason

    Hi Gary,

    I just got a notice from the IRS that I owed 683$ for not reporting a cancelled debt of 4878$ on my 2013 return. I received 1099C in Dec of 2012 and I threw it away. I did the insolvency work sheet and I’m insolvent to the extent of over 30,000$ dollars because of student loans. Should I send the 982 form back with the with the IRS notice marking that I don’t acknowledge the debt and what documentation should I send with it?

    • I’m not sure what your asking here Jason. The IRS will follow up on the 2012 Form 1099-C, Cancellation of Debt. It sounds like you received an IRS Notice CP2000 for 2013? If the 2013 Form 1099-C wasn’t yours, sure I’d battle that with the IRS.

  • Michael

    Hi Gary,

    I entered debt relief program in October and all of the negotiated settlements will occur this year 2014. I haven’t received any 1099-C’s for 2013 but I expect I will a year from now. As I am finishing my taxes for 2013, is there anything I need to prepare for for next year. Would I file a 982 now or not until I receive the 1099’s next year.


  • Eddie

    In a common law state, do I include my spouse’s assets/liabilities for form 982 if I file jointly and both of us are insolvent (both withstudents loans, mortgage,etc)? The auto/repo discharged debt is for $4,000 (filing separately would cost more than the taxable income on the forgiven debt).

  • Kurt

    I received 4 1099C’s from Chase for 4 separate credit cards that they cancelled the debt on in July 2013. I filed for personal Chapter 7 bankruptcy in Dec. 2013, and these accounts were included in that filing. I didn’t receive any other 1099c’s from any other creditors. So when filling out form 982, and checking part 1, box A (discharge due to a title 11 case), what amount do I put in part 2? the total amount of my debt being discharged in the full bankruptcy, or JUST the total of the 4 1099c’s that I received? Also, how do I list this under the Part 2 section of Reduction of Tax attributes? I called the IRS, and they don’t help with these questions anymore…of course.

    • That number is lowest of three separate calculations Kurt. I don’t have info enough info to answer. Publication 4681 has a good example that might help you. There’s a website that provides a comprehensive example of those calculations at form982.com.

  • Kim

    I received a 1099-C for canceled debt for a business credit card that I was the guarantor. My parents own the business. I got the card because of my great credit at the time. I made an arrangement to pay a certain amount back. They sent the 1099-c to the store but in my name only and my ss only. This was a business card. Shouldn’t the business have to show this as income not me personally. The problem is my social security is not linked to the business and I want them to know it was definitely added to the income. What do I do to show them?

    • Well Kim, if you’re listed on any of the past tax returns that might help. The IRS thinks the Form 1099-C, Cancellation of Debt, is Gospel. So it may be difficult to circumvent it being personal. If you can use Form 982 to exclude it from taxable income you might consider doing that.

  • Daniel Ekerman

    I received 2 1099-c for cancelled credit card debt in 2012. I filled out a 982 in 2013 and put that that I was insolvent on the form (which I was due to high student loan debt). Then out of nowhere I get a bill from the IRS saying I owe tax on the cancelled debt? What can I do?

    • Hi Daniel. You probably didn’t include all the documentation the IRS requires. May not be a problem. I can look at that IRS Notice if you like and then talk to you. A copy of the tax return would help as well. If I can help, I will. Fax # 910 401 1026. Please include your contact information.

  • Shinky

    Mr. Bode,
    Regarding interest in pension plan, and 401 K’s as asets in the insolvency worksheet… I am not of retirement age, so do I still include the amounts in my company’s pension plan at the time of the identifiable event (in 1099-C- cancellation of debt ) ? And, if we cannot borrow from our 401Ks, or withdraw without penalties (due to our age), do we still list these as assets in the insolvency worksheet?
    Thank you in advance for your response.

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