Loan Forgiveness

[Corduroy Frog]

Mortimer owes $10,000 to MegaBank, among numerous other debts, and declares bankruptcy.  Through the arrangements, MegaBank agrees to accept $1500 as part of the bankrupt settlement.

Question:  Although MegaBank has agreed (reluctantly) to accept only $1500, can they (or should they) issue 1099-C to Mortimer for $8500?

[kathyc2]

Instructions for 1099C:  https://www.irs.gov/instructions/i1099ac#en_US_202201_publink1000284973

If insolvent it's not taxable, but if form received it needs to be accounted for on return.

[jklcpa]

Yes, please see the instructions to preparing 1099-C and "Who Must File" and the large bold heading under that labeled "Exceptions".

It seems that the form's issuance depends on the type of bankruptcy and whether the debt was for business or investment, or if it was for personal use. 

[Catherine]

The forms may also insidiously end up being issued years afterwards, when the taxpayer is no longer insolvent. Then it can become taxable income.

[kathyc2]

22 minutes ago, Catherine said:

The forms may also insidiously end up being issued years afterwards, when the taxpayer is no longer insolvent. Then it can become taxable income.

Solvency is calculated immediately before discharge. Only if the date of identifiable event is incorrect on form would solvency after the fact be considered. 

[Corduroy Frog]

Thank you to all who have participated in the answer.

Often I am responded to with a IRS link, which I believe to be perhaps the most official answer in existence.  I am admittedly lazy for not researching on my own.  I ask questions because I do want an alternative to spending 45 minutes reading something.  One link a couple years ago resulted in 71 printed pages.

But for Kathy, Judy, and Catherine, thank you so much for responding.  I have my answer.