Millions of Americans get into debt each and every year, of which, some of that debt, be it a car loan, a student loan, a mortgage, a medical bill, a credit card charge, and so on, isn’t going to realistically ever be paid back. At some point, for most of those lenders, they sell that debt to a bill collector; but even these bill collectors, will at some point, reach their breaking point, in which, they simply give up, though often with having been a considerable pain in the side of the debtor, throughout – still, bill collectors are realists, so when there is that situation in which someone declares bankruptcy, or dies, or has no visible means of income, or the provenance of that debt is questionable, or the debtor has successfully fought back, or by various other reasons, some of these debt collectors will call it a day and will duly close shop on that delinquent account.
One would think, that when a debt release form is signed, or a paper is received by the debtor in which the previous debt has been forgiven, that the debtor would see themselves thereupon as being free and clear, knowing that a debt forgiven, means that they won’t have to worry about such a debt anymore, in the sense of phone calls, letters, or the negative impact on their credit report. Yet, in many a case, people that have had debts forgiven, will ultimately receive a 1099-C, typically reflecting the total amount of the debt so forgiven, and thereby by virtue of that form, that amount so of, will now be considered to be income to that individual on their tax return.
That is to say, if a debt, for example, of $5000 is forgiven, the taxpayer might well receive a 1099-C, for that $5000, which is considered to be taxable income for that person, and most definitely, does so make a difference in their subsequent tax obligation or tax refund. The main problem with this construct, is the fact that a forgiven debt, hardly seems as if it should be most appropriately classified as income in the first place; in addition to the fact that as of 2022, each citizen is entitled to receive up to $16,000 from any one entity, so classified as a gift, that has no tax consequences for the recipient, thereof. This would seem to reflect that foisting a 1099-C, upon someone that probably isn’t in all that good of financial shape to begin with, seems like something akin to “sour grapes,” and that the least the IRS should do in these types of circumstances, is to classify debts forgiven of up to $16,000, as a “gift” to the individual, and never as income, because in reality a forgiveness of debt, seems a lot more in keeping with a gift, as opposed to somehow being fairly classified as income.
The probable reason of why debt forgiveness, necessitates a 1099-C, is the fact that those that issue out loans of all sorts to people, don’t like it when they are unable to collect their money, and therefore feel a need to “punish” those that don’t play by their rules; which seems petty on their part, and certainly not in keeping with the fact that loss provisions are prudently made in any professional business enterprise, as simply being the cost of doing business to begin with.