Can I Exclude Cancellation of Debt Income?

When a lender forgives or cancels a debt, the forgiven amount is generally taxable income — you'll receive a Form 1099-C. However, there are important exclusions: if you were insolvent at the time of discharge (liabilities exceeded assets), you can exclude the canceled debt up to the amount of your insolvency on Form 982. Debt discharged in bankruptcy is fully excluded. Home mortgage debt canceled under certain programs may also be excluded. Student loan debt forgiven due to disability, death, or certain income-driven repayment programs may be excluded under legislation passed in 2021 (through 2025). Don't ignore a 1099-C — if an exclusion applies, you still need to report it and claim the exclusion.