Change to 1099-C Filing Rules

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Mark J. Corey, CPA, JD

As the 1099 filing season fast approaches, here is a summary of the 1099-C filing rules and a note on a significant change in when to file a 1099-C.

When to file a 1099-C

File a 1099-C when $600 or more in debt secured by the property is discharged or deemed to be discharged based on one of the following eight identifiable events (also listed in Treasury Regulation § 1.6050P-1(b)(2)):

  1. Discharge of debt in bankruptcy;
  2. Debt is rendered unenforceable in foreclosure, receivership or fed/state court proceeding;
  3. Expiration of the statute of limitations on collection, filing a claim, or filing a deficiency judgment proceeding;
  4. Bank's election of foreclosure remedies which by statute prohibit collection of deficiency;
  5. Debt is rendered unenforceable in a probate or similar proceeding;
  6. Agreement between Bank and borrower to discharge debt at less than full consideration (deed in lieu);
  7. Decision by the Bank or application of a defined policy of the Bank to discontinue collection activity and discharge the debt;
  8. Other actual discharge before an identifiable event.

A significant change to the 1099-C filing rules enacted for the 2017 filing season is the elimination of the so called “36 month rule” which was previously the 8th identifiable event.  The 36 month rule required the filing of a 1099-C upon the expiration of the "non-payment testing period" which created a rebuttable presumption that debt had been cancelled where the bank had not received a payment on the debt at any time during the 36 months ending at the close of the calendar year.  This provision was removed as an identifiable event because it was seen as creating considerable uncertainty as to whether the lender could still continue collection activity after being required to file the 1099-C under this identifiable event.

When you do not need to file a 1099-C

  1. Bankruptcy of debtor- unless the debt was incurred for business or investment purposes.
  2. Interest- you can optionally show separately in box 3.
  3. Non-principal amounts.
  4. Foreign debtors.
  5. Related parties
  6. Release of a debtor- as long as the remaining debtors are liable for the full unpaid amount
  7. Guarantor or surety (Guarantor is not a debtor for purposes of filing Form 1099-C even if demand for payment is made)
  8. Seller financing

The rules related to the reporting of cancelled debt can be complicated.  Please consult with your professional tax advisor if you have questions on your tax filing responsibility.