What Is Cancellation of Debt Income?

Cancellation of debt income is the taxable amount that results when a lender forgives or cancels a debt you owe — the IRS generally treats forgiven debt as income because you received value (the loan proceeds) that you no longer have to repay. When a creditor settles a debt for less than you owe or discharges it entirely, you'll typically receive a Form 1099-C from the lender showing the amount forgiven, which you must report as income. However, there are important exceptions: debts discharged through bankruptcy are completely excluded from income; if you were insolvent immediately before the cancellation (your debts exceeded your assets), you can exclude the canceled amount up to the extent of your insolvency. Forgiveness of certain student loans under qualifying programs may also be excluded. Mortgage debt forgiven through a short sale or foreclosure can trigger cancellation of debt income, though special housing exclusions may apply depending on your situation and the year of forgiveness.