The IRS does not consider debt that is owed to be income to the consumer, as the consumer is obligated to repay the debt.
However, if debt is cancelled (excused) by a creditor, the IRS then considers the debt to become "income" to the consumer.
When a creditor agrees to settle a debt for less than the full amount, they are cancelling the obligation to repay the difference between the full debt and the agreed settlement amount. That cancelled difference, if $600 or more, is then required to be reported on form 1099c to the IRS and to the consumer, and may become taxable income in the year it was issued.
I say may because issuance of a 1099c does not necessarily mean that the consumer is obligated to pay tax on the cancelled debt.
There are exclusions from taxability. If the consumer can show they were insolvent when the debt was cancelled, meaning their total liabilities exceeded their assets, then the cancelled debt can be exempted from tax obligation.
Consult a tax advisor if/when you receive a 1099c. Dont simply include in your tax return and pay income tax if you qualify for an exemption.
