See 26 USC 108. It is in the bankruptcy code. When settling debt I always send out a dispute letter before trying to settle, then it is not taxed. Also if the debtor is insolvent at the time of settlement it is not taxed. I have sent out an insolvency letter to the IRS and it works, especially now in these economic times. If you go to the IRS site and look up the form uses section, it lists who must issue a 1099-c. It’s required in those instances. Discover would be one of those entities. Form 982 from the IRS enables a taxpayer to exclude certain forgiven debt from income. And if the insolvency exception applies (careful – unlike in BK, exempt assets and retirement plans are counted as assets), who cares if you get a 1099. And note that tax attributes still need to be adjusted if an exception to COI income applies.

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