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If Your Creditor Writes Off a Bad Debt it Could Be a Taxable Transaction.

 

If a creditor writes off a bad debt and ceases collection and the amount of the debt is for more than $600.00, there is an IRS requirement that requires the creditor to report to the IRS the amount of the write-off on Form 1099-C which is the form that is used to report income. This means that you will have to report the debt that is written ff as income to you when you file the next year's tax return.  Thus, if you didn't pay your credit card bill you and it is written off by the credit card company, you could find that you own income when you file your return.

There are several exceptions to this rule:

  • If you discharge the debt in bankruptcy it is not considered income.

  • If you are insolvent before the creditor write off the debt.

  • If the debt that is written off is considered a gift.

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