If you went through a foreclosure, sold your home short, or had credit card debt forgiven in 2010, then you probably received a 1099-C in the mail early this year. Hopefully you didn't ignore it and shove it in the back of your desk, because this is a form that could cause some serious problems if not given the proper attention.
Creditors send copies of the 1099-C to both you and the IRS whenever they forgive debt you owe. But why does the IRS care if your creditor forgave your debt? Because they want you to pay taxes on it! Yes, that's right—forgiven debt is considered taxable income by the IRS. It may sound crazy, but it's true.
The good news is you might be eligible to avoid paying taxes on forgiven debt if you qualify for an exclusion or exception per IRS guidelines. Some examples include debt that was officially discharged in a bankruptcy, mortgage debt for a principal residence, or if you were considered technically insolvent (your total debt exceeded your assets) when the debt was canceled.
