If you are one of the unlucky taxpayers who received a 1099-C form reporting “cancelled debt income” this year, you may be wondering whether it will affect your credit scores.
The answer is “no.” Not in and of itself, anyway. If you’ve received a 1099-C, the damage to your credit has most likely already been done.
What Is a 1099-C?
A 1099-C is a tax form that the IRS requires lenders use to report “cancellation of indebtedness income.” This form must be filed in certain circumstances where more than $600 in debt is cancelled, or goes unpaid for a certain period of time. The lender files this form with the IRS and a copy is supposed to be sent to the taxpayer as well. A copy of the 1099-C is not supplied to credit reporting agencies, though, so in that respect, the fact that you received the form has no impact on credit reports or scores whatsoever.
Does that mean you don’t have to worry about your credit when you get one of these forms?
Not exactly. The event that triggered the 1099-C — unpaid credit card debt, for example, or a foreclosure or short sale of your home, a vehicle repossession or other incident in which you did not pay a debt — almost certainly has been reported on your credit reports. In some sense, then, the damage has already been done.
As we’ve explained in other articles, there is a great deal of confusion around these forms. Sometimes they are issued for the wrong amount or in the wrong year, and you, the taxpayer who gets one of these forms, has to try to deal with those inaccuracies.
How Your Credit Reports Can Help
That’s where your credit reports can come into play. They can be a valuable source of information when you are dealing with a 1099-C. Check your free credit reports to help determine precisely when the lender claims you defaulted on the debt. One of the main ways consumers avoid paying taxes on cancellation of indebtedness income is by claiming the insolvency exclusion. To do that, they need to compare their liabilities to their assets right before the debt was cancelled. Your credit report can help jog your memory about when your credit card was charged off, for example, or when your vehicle was repossessed. You may need those dates when filling out the insolvency worksheet in IRS Publication 4681.
It can also be helpful in situations where a creditor is issuing a 1099-C for an old debt. We have received numerous complaints from consumers that they have received these forms for debts that were written off years ago. If the credit report shows that a debt was charged off six years before a 1099-C was issued, that may be useful in helping to establish that the 1099-C was issued in the wrong tax year. (Generally a 1099-C must be issued for the tax year an identifiable event, like cancellation of the debt, occurred, or after three years of no substantial collection activity.)
What If the Debt Was Included in a Bankruptcy?
Another way consumers avoid paying taxes on cancelled debt is by letting the IRS know they discharged that debt in bankruptcy. While your bankruptcy discharge papers are the best way to confirm which debts were discharged, you may have put away your bankruptcy papers and have trouble finding them. If so, your credit report should list the date your bankruptcy case was filed and discharged, as well as indicate which accounts were included in your case. That information can be useful while you try to track down your paperwork. (You may have to request it from the bankruptcy court if you did not keep a copy.)
Because a 1099-C is issued as a result of a problem paying a debt, it’s helpful to obtain your free annual credit reports. This can assist you in understanding the dates and amounts listed on one of these forms. Once you have dealt with the cancellation of indebtedness income tax issue, consider checking your free credit scores to see how your credit has been affected. You can do this using Credit.com’s free Credit Report Summary. It provides two free credit scores plus a snapshot of the five key areas affecting your scores.
This article has been updated. It was first published April 24, 2014.