Start My Answer

Do You Owe Taxes on Settled Debt?

Sarah Edwards | August 16, 2022

If you settled a debt recently, you may be taxed for the difference.

Summary: If you have settled a debt recently, you probably owe taxes on the settlement unless the debt was cancelled as a gift or inheritance, met certain student loan cancellations, occurred as a result of bankrupcty, or you were insolvent. Here is SoloSuit's guide on debt settlement and taxes.

You've managed to eliminate your debt through settlement, and you're happily moving on with your life, no longer worried about meeting monthly minimum payments or missing them altogether.

One January afternoon, you open your mailbox to discover a notification from your old lender. What's in the notification? A 1099-C, especially for you. Cue the irritation!

Your 1099-C indicates that you have discharged debt through a settlement agreement during the past year. According to the notice, an amount of $6,000 was forgiven by your credit card lender. This notice matches what you recall, but you're unsure what the notice means. Do you pay taxes on debt? What should you do?

Do you pay taxes on debt?

The IRS has certain rules regarding the cancellation of debt. In some cases, you will owe taxes, but in others, you won't. For credit card debt that you've managed to settle through an agreement, any debt that was forgiven should be included as income. Specific language that the IRS uses indicates that:

“If you receive a Form 1099-C, that means an applicable entity has reported an identifiable event to the IRS regarding a debt you owe. Unless you meet one of the exceptions or exclusions, this canceled debt is ordinary income and must be reported on the appropriate form.” (IRS, 2021 Publication 4681)

Generally, you will need to include the debt that was forgiven as ordinary income on your tax return unless you meet certain criteria. This rule means it will be taxable.

What are the exemptions allowed for excluding my debt as ordinary income?

Most canceled debt will be counted as ordinary income unless it meets certain criteria. If the debt is canceled under the following circumstances, you may not need to include it as ordinary income:

  • Debt was canceled as a gift or inheritance.
  • Certain student loan cancellations.
  • Canceled debt occurred as a result of bankruptcy.
  • You were insolvent before the cancellation of the debt.

If your debt was canceled in any of the above situations, then you may not need to include it as ordinary income. There are a few other exceptions, but they are a bit more rare and won't apply to the majority of individuals.

You can consult the IRS Publication 4681 guidelines if you feel you might qualify for special circumstances, such as if your debt pertained to farming or a business.

What student loan cancellations can be excluded from ordinary income?

The IRS advises that if you are responsible for the student loan, and it is canceled or repaid by someone else, then you must include that amount as ordinary income. However, if you meet certain exceptions, you may not have to do so.

For example, teachers who have their loans forgiven due to their employment in specific facilities, such as designated inner-city schools, may not need to include their canceled debt as ordinary income.

There is also a special rule introduced for 2021 through 2025. This rule allows individuals with canceled student loans obtained from private lenders or for postsecondary educational expenses to be excluded from ordinary income.

This rule generally applies to all student loan debt for undergraduate or graduate-level expenses that is canceled during these years.

Do I owe taxes on debt canceled from bankruptcy?

Individuals who have filed and had their debt canceled through bankruptcy will not need to include the amount canceled as ordinary income for the year. This rule includes Chapter 7, Chapter 11, and Chapter 13 bankruptcies. To qualify, the debt canceled must have been approved by the court or have been part of a plan approved by the court.

What is insolvency? Do you pay taxes on debt if you are insolvent?

Insolvency, as defined by the IRS, means that:

“You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities was more than the FMV of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own.” (IRS, 2021 Publication 4681)

The IRS provides an insolvency worksheet to help you determine whether you were insolvent prior to the cancellation of your debt. The insolvency exclusion is one of the most common ways to prevent canceled debt from being included as ordinary income on the tax return.

What should I do if I don't meet any of these exemptions?

So do you pay taxes on debt? If you don't meet any of the common exemptions, you'll most likely need to include your canceled debt as ordinary income on your tax return. Before doing so, double-check IRS 2021 Publication 4681 to make sure you don't qualify for any of the less-common exemptions.

If you file form 1040 or 1040 SR, the amount of your canceled debt will be included as other income on line 8. It will also be included as a supporting amount for Schedule 1. This setup means that it will be included as part of the income you earned during the prior year and will be taxable.

If you typically receive a refund after you file your taxes, your refund may be less than you expect, or you may find out that you owe taxes, depending on the amount that is canceled and your overall financial situation.

Should you find that you do owe taxes, hopefully, it doesn't cause too much of an issue, and you will be able to pay them on time. The IRS offers several options to pay taxes over an extended period of time if you're unable to pay what you owe by the deadline.

To learn more about debt settlement and taxes, check out this video:

Need help settling a debt?

You can start the debt settlement process by sending a Debt Lawsuit Settlement Letter to the party suing you. Keep in mind that, on average, debts can be settled for 45% of the original amount. By settling your debt, you can avoid going to court and paying for court costs and attorney fees.

If you can afford to pay off a portion of your debt, settling may be your best option. SoloSuit can help you start the settlement journey and respond to a debt lawsuit with a legal Answer.

What is SoloSuit?

SoloSuit makes it easy to fight debt collectors.

You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.

SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.

Respond with SoloSuit

"First time getting sued by a debt collector and I was searching all over YouTube and ran across SoloSuit, so I decided to buy their services with their attorney reviewed documentation which cost extra but it was well worth it! SoloSuit sent the documentation to the parties and to the court which saved me time from having to go to court and in a few weeks the case got dismissed!" – James


Get Started


We have answers.
Join our community of over 40,000 people.

You can ask your questions on the SoloSuit forum and the community will help you out. Whether you need help now or are just looking for support, we're here for you.


Ask a Question


>>Read the FastCompany article: Debt Lawsuits Are Complicated: This Website Makes Them Simpler To Navigate

>>Read the NPR story on SoloSuit. (We can help you in all 50 states.)

How to answer a summons for debt collection in your state

Here's a list of guides for other states.

All 50 states.



Guides on how to beat every debt collector

Being sued by a different debt collector? Were making guides on how to beat each one.


Win against credit card companies

Is your credit card company suing you? Learn how you can beat each one.

Going to Court for Credit Card Debt — Key Tips

How to Negotiate Credit Card Debts

How to Settle a Credit Card Debt Lawsuit — Ultimate Guide

Get answers to these FAQs

Need more info on statutes of limitations? Read our 50-state guide.

Why do debt collectors block their phone numbers?

How long do debt collectors take to respond to debt validation letters?

What are the biggest debt collector companies in the US?

Is Zombie Debt Still a Problem in 2019?

SoloSuit FAQ

If a car is repossessed, do I still owe the debt?

Is Portfolio Recovery Associates Legit?

Is There a Judgment Against Me Without my Knowledge?

Should I File Bankruptcy Before or After a Judgment?

What is a default judgment?— What do I do?

Summoned to Court for Medical Bills — What Do I Do?

What Happens If Someone Sues You and You Have No Money?

What Happens If You Never Answer Debt Collectors?

What Happens When a Debt Is Sold to a Collection Agency

What is a Stipulated Judgment?

What is the Deadline for a Defendants Answer to Avoid a Default Judgment?

Can a Judgement Creditor Take my Car?

Can I Settle a Debt After Being Served?

Can I Stop Wage Garnishment?

Can You Appeal a Default Judgement?

Do I Need a Debt Collection Defense Attorney?

Do I Need a Payday Loans Lawyer?

Do student loans go away after 7 years? — Student Loan Debt Guide

Am I Responsible for My Spouses Medical Debt?

Should I Marry Someone With Debt?

Can a Debt Collector Leave a Voicemail?

How Does Debt Assignment Work?

What Happens If a Defendant Does Not Pay a Judgment?

How Does Debt Assignment Work?

Can You Serve Someone with a Collections Lawsuit at Their Work?

What Is a Warrant in Debt?

How Many Times Can a Judgment be Renewed in Oklahoma?

Can an Eviction Be Reversed?

Does Debt Consolidation Have Risks?

What Happens If You Avoid Getting Served Court Papers?

Does Student Debt Die With You?

Can Debt Collectors Call You at Work in Texas?

How Much Do You Have to Be in Debt to File for Chapter 7?

What Is the Statute of Limitations on Debt in Washington?

How Long Does a Judgment Last?

Can Private Disability Payments Be Garnished?

Can Debt Collectors Call From Local Numbers?

Does the Fair Credit Reporting Act Work in Florida?

The Truth: Should You Never Pay a Debt Collection Agency?

Should You Communicate with a Debt Collector in Writing or by Telephone?

Do I Need a Debt Negotiator?

What Happens After a Motion for Default Is Filed?

Can a Process Server Leave a Summons Taped to My Door?

Learn More With These Additional Resources:

Need help managing your finances? Check out these resources.

How to Make a Debt Validation Letter - The Ultimate Guide

How to Make a Motion to Compel Arbitration Without an Attorney

How to Stop Wage Garnishment — Everything You Need to Know

How to File an FDCPA Complaint Against Your Debt Collector (Ultimate Guide)

Defending Yourself in Court Against a Debt Collector

Tips on you can to file an FDCPA lawsuit against a debt collection agency

Advice on how to answer a summons for debt collection.

Effective strategies for how to get back on track after a debt lawsuit

New Hampshire Statute of Limitations on Debt

Sample Cease and Desist Letter Against Debt Collectors

The Ultimate Guide to Responding to a Debt Collection Lawsuit in Utah

West Virginia Statute of Limitations on Debt

What debt collectors cannot do — FDCPA explained

Defending Yourself in Court Against Debt Collector

How to Liquidate Debt

Arkansas Statute of Limitations on Debt

Youre Drowning in Debt — Heres How to Swim

Help! Im Being Sued by My Debt Collector

How to Make a Motion to Vacate Judgment

How to Answer Summons for Debt Collection in Vermont

North Dakota Statute of Limitations on Debt

ClearPoint Debt Management Review

Indiana Statute of Limitations on Debt

Oregon Eviction Laws - What They Say

CuraDebt Debt Settlement Review

How to Write a Re-Aging Debt Letter

How to Appear in Court by Phone

How to Use the Doctrine of Unclean Hands

Debt Consolidation in Eugene, Oregon

Summoned to Court for Medical Bills? What to Do Next

How to Make a Debt Settlement Agreement

Received a 3-Day Eviction Notice? Heres What to Do

How to Answer a Lawsuit for Debt Collection

Tips for Leaving the Country With Unpaid Credit Card Debt

Kansas Statute of Limitations on Debt Collection

How to File in Small Claims Court in Iowa

How to File a Civil Answer in Kings County Supreme Court

Roseland Associates Debt Consolidation Review

How to Stop a Garnishment

Debt Eraser Review

Do Debt Collectors Ever Give Up?

Can They Garnish Your Wages for Credit Card Debt?

How Often Do Credit Card Companies Sue for Non-Payment?

How Long Does a Judgement Last?

​​How Long Before a Creditor Can Garnish Wages?

How to Beat a Bill Collector in Court