What Is a Cancellation of Debt?
If you’ve had a credit card balance forgiven, settled a loan for less than you owed, or had a lender write off a portion of your debt, you may have experienced something called a cancellation of debt. While having debt forgiven can feel like financial relief, many Baltimore residents are surprised to learn that canceled debt can sometimes create new tax consequences.
At The Law Offices of Nicholas J. Del Pizzo, we regularly help Maryland residents understand how debt forgiveness works, especially when bankruptcy may offer a better solution. Below, we explain what cancellation of debt means, how it can impact your taxes, and how bankruptcy can protect you from unexpected financial consequences.
What Is Cancellation of Debt?
Cancellation of debt (sometimes called “debt forgiveness” or “debt discharge”) occurs when a lender agrees to forgive or cancel part or all of a debt you owe. This commonly happens when:
-
You settle a credit card for less than the full balance
-
A lender writes off unpaid debt
-
A mortgage lender forgives a deficiency after foreclosure
-
A repossessed vehicle leaves a remaining balance that is forgiven
For example, if you owe $20,000 on a credit card and the lender agrees to settle the debt for $12,000, the remaining $8,000 may be considered canceled debt.
In many cases, creditors report the forgiven amount to the IRS using Form 1099-C (Cancellation of Debt).
Is Cancellation of Debt Taxable?
In many situations, yes — canceled debt is considered taxable income by the IRS.
The IRS generally treats forgiven debt as income because you originally borrowed money that you did not repay. That means the canceled amount may be added to your taxable income for the year.
However, there are important exceptions, including:
-
If the debt was discharged in bankruptcy
-
If you were insolvent at the time the debt was canceled
-
Certain qualified principal residence indebtedness (in limited circumstances)
-
Some student loan forgiveness programs
This is where many Maryland residents run into trouble. They settle a debt thinking they’ve solved the problem — only to receive a 1099-C form and face an unexpected tax bill.
How Does Cancellation of Debt Affect Taxes?
If you receive a 1099-C, the forgiven amount may increase your taxable income for that year. This could:
-
Push you into a higher tax bracket
-
Increase your state and federal tax liability
-
Reduce your tax refund
-
Create a tax debt you cannot afford
For Baltimore residents already struggling financially, this additional tax burden can feel overwhelming.
It’s also important to understand that Maryland state taxes may apply in addition to federal taxes. Failing to properly report canceled debt — or failing to claim an exemption when applicable — can lead to audits or penalties.
This is why it’s critical to speak with a qualified attorney before agreeing to any large debt settlement.
Navigating Debt Cancellation in Bankruptcy
One of the most powerful protections available to Maryland residents is bankruptcy.
If debt is discharged through Chapter 7 or Chapter 13 bankruptcy, the canceled amount is generally not taxable. This is a major advantage over private debt settlement.
When you file for bankruptcy:
-
Your eligible debts are legally discharged by the court
-
Creditors cannot pursue further collection
-
The discharged debt is not treated as taxable income
For many individuals in Baltimore and the surrounding communities, bankruptcy can provide a cleaner, more comprehensive solution than negotiating individual settlements that may result in tax consequences.
At The Law Offices of Nicholas J. Del Pizzo, we help clients evaluate whether bankruptcy is the right path — taking into account not just the debt itself, but also the potential tax implications and long-term financial impact.
Contact The Law Offices of Nicholas J. Del Pizzo for All Your Financial Concerns
If you’ve received a 1099-C, settled a debt, or are considering bankruptcy in Maryland, it’s important to understand your legal options before making your next move.
At The Law Offices of Nicholas J. Del Pizzo, you work directly with Nick — not a paralegal or junior associate. We take the time to review your financial situation, explain your options clearly, and develop a strategy that protects your rights and your future.
Whether you’re facing overwhelming debt, foreclosure, creditor harassment, or complex financial questions about cancellation of debt, we are here for you — seven days a week.
Your case becomes our cause.
Contact our Baltimore office today to schedule a confidential consultation and take the first step toward financial relief.
