The first reaction upon receiving the form 1099-C may be panic with a myriad of questions in your mind. Both the 1099-C form and 1099-A are for debts that were wiped out in bankruptcy, forgiven or never repaid. This post will provide you with complete details about form 1099-C and its impact on your credit report.
What kind of form is it?
A 1099-C is a tax form filed by a lender or the issuer of your credit card. The 1099-C form reports “Cancellation of Debt Income” or CODI and represents the debts that creditors have forgiven. This is one of the major reasons as to why this form is called a cancelation of debt—when the debts with the creditors are settled, a 1099-C form is sent to you by them suggesting that the creditors have chosen not to collect debt anymore.


In such a case, the entire principal balance that is due to be paid is reported to the IRS. As an example, if creditors have cancelled the due amount of $5,000, they will report to the IRS the balance for the impending tax year.
A 1099-C usually comes as a surprise to the receiver because they often think their troubles are over after they have settled the debt. Upon receiving the form, a Certified Public Accountant will assure that cancelled debts are included on the other income in line 21 of Form 1040.
Credit Report Effect
As far as credit reporting is concerned, a tax preparer will suggest that the settled or cancelled debts are not paid entirely. Irrespective of the type of debt, there is a major disparity between the two. Settlements do have an adverse impact on credit reports such that they are believed to be deprecating. This is for the simple reason that the loan and obligation is enlisted as default.
The form 1099-C flaunts negativity of your credit report and that is also for the maximum tenure of seven years. According to tax preparers, the creditor still holds the right to collect the debt that was left unpaid. An account when settled or cancelled that has been settled is reported to have zero balance despite the fact that the balance has not been paid off entirely. Negative aspect on credits makes you suffer, whether it be it the owner of a small business or an individual.
What to Do?
There is a great possibility that you may not be informed about receiving a form 1099-C, and end up creating a taxable event such as selling bond or stock.
But in view of everything, it’s always wise to pay off the debt entirely. You will net out further in retrospect to a surprise 1099-C. In cases like this, hiring a debt settlement company or a Certified Public Accountant to help you settle debts will cost a hefty price, and may not be worth investing in when it could be done yourself.