Hello mgo,
Anytime that you have a forgiveness of debt by a lender, they are required by law to issue a 1099 form. This is not an option they have of whether or not to issue this form, as it is required by law they they do so.
When you are issued a 1099 form to report this cancelled debt, you may still qualify to exlcude this debt from your taxable income if you either
a) File bankruptcy and have the property taken by the bankruptcy trustee or
b) Show that you were insolvent at the time this cancelled debt occured.
To show that you were insolvent, you would need to file Form 982 with your tax return and attach a statement which showed a listing of your assets and liabilities. If your liabilities were more than your assets by at least the amount of the forgiven debt, then you would not be liable for any tax on this amount.
If you do not file bankruptcy and you cannot show that you were insolvent, then you will be liable for tax on the full amount of the debt which is forgiven.
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Thank you mgo
Accountant
25+ years tax consulting. Specializing in returns for US citizens living abroad