You settled a debt for less than you owed. Here's what to expect when you file your taxes.

Key points

• The IRS generally treats forgiven debt of $600 or more as taxable income.
• Creditors must report canceled debt of $600 or more to the IRS on Form 1099-C.
• The insolvency exclusion can reduce or eliminate tax on canceled debt.

Borrowers who settle a debt for less than they owe may face a tax bill on the forgiven amount. The IRS generally treats canceled debt of $600 or more as taxable income, according to the article.

For example, someone who owed $15,000 on a credit card and settled for $6,000 would generally have $9,000 of canceled debt added to their taxable income. That does not mean owing $9,000 in taxes, but it can raise overall tax liability.

Paperwork from creditors

A qualifying lender or debt collector that cancels $600 or more of debt is generally required to report it to the IRS using Form 1099-C. Borrowers typically receive a copy during the filing period after the year the debt was canceled, such as early 2027 for a 2026 settlement.

Not receiving the form does not remove the obligation to report taxable canceled debt, the article says. Borrowers should also keep their settlement agreement and proof of payment.

You're considered insolvent when your total debts exceed the fair market value of your assets immediately before the debt cancellation.

— CBS News

Possible exclusions

Some IRS exclusions can reduce or eliminate the amount reported as income. Under the insolvency exclusion, a person whose total debts exceed the fair market value of their assets immediately before cancellation may be able to exclude part or all of the forgiven amount.

Debt discharged through qualifying bankruptcy proceedings may also be excluded. Taxable canceled amounts for ordinary personal debts are generally reported on Schedule 1 of Form 1040, and Form 982 is typically used to document an exclusion.