The Tax Consequences of Written-Off Credit Card Debt

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As of Sept. 2013, American consumers owed $849.8 billion in credit card debt, which worked out to an average of $15,185 per household. If this number seems large, it's because of the influence of relatively few households with high credit card debt levels. If you can’t pay your credit card debt, the card issuer may eventually write it off. That removes the debt, but also may create a tax liability for you.

Debt Forgiveness

Credit card companies are in no hurry to write off the debt you owe. Your debt might age for 180 days or more before the credit card issuer will consider a write-off. Depending on how much you owe, you might face legal action that could force you into bankruptcy. If your card issuer forgives the debt, you might have to include the written-off amount in your taxable income.

Reporting a Write-Off

Your credit card company will send you Internal Revenue Form 1099-C when it cancels $600 or more of debt principal -- this amount does not include interest and late fees. You must include the amount reported as “other income” on IRS Form 1040. If a court declares you bankrupt under Title 11 -- this includes Chapters 7, 11 and 13 -- you do not have to include the cancelled debt in income. However, you must file Form 982 with your tax return to exclude the forgiven debt.


You can exclude written-off debt from income if you were insolvent immediately before the credit card issuer cancelled your debt. Insolvency occurs when your debts exceed your assets, including your money, investments and the fair market value of the property you own. You can figure the extent of your insolvency using the worksheet in IRS Publication 4681. You must report your insolvency on Form 982. You can exclude forgiven debt from income only to extent that your debts exceed your assets.

Insolvency Example

Suppose you file Form 982 reporting that your debts exceed your assets by $4,000. Your credit card company then cancels $6,000 of debt. You must pay tax on the excess of the forgiven amount over your insolvency amount, which in this case is $6,000 minus $4,000, or $2,000. If you are also bankrupt, exclude any forgiven debt resulting from the bankruptcy before figuring your insolvency exclusion. If you and your spouse are joint owners of the credit card account, figure your insolvency as a couple and as separate filers to see which filing method reduces your tax obligation more.