If a loan is not satisified in full, meaning the creditor accepts less than the outstanding balance due to hardship, etc. they will sometimes issue a 2009 Form 1099-CCancellation of Debt which is what I suspect you are speaking of. Under normal circumstances, the $ amount of the canceled debt is taxable income to the recipient (you), and you pay 15 cents or 25 cents on the dollar, depending on whatever tax bracket you're in.
However, there are ways to NOT have to pay on the cancellation of debt, even though the 1099C form has been filed. Please see below:
2. Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
- Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
- Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception
I would think that you would stand an excellent change of having the cancellation of debt not be taxable to you by filling out Form 982 (Rev. March 2009)
and proving yourself insolvent due to the extensive medical bills.
Please find an Enrolled Agent, CPA or professional tax preparer in your area to help walk you thru this process. As I said, I think you probably have an excellent chance for proving insolvency, but I think you need to take all of your papers to an expert and have them review them. Since I work for H&R Block, I know there should be at least 1 office in your area that's open year round for just these kind of situations, but often independent CPA's will also have offices open year round. Call around, ask if they have expierence in dealing with cancellation of debt and insolvency.
I wish you the best of luck, and I beleive, as I stated above, that you stand an excellent chance of proving yourself insolvent at the time the debt became due, and that will keep you from having to pay any tax on this as income even though HFC filed the form.
I hope this helps.