Under the Internal Revenue Code (IRC § 61(a)(11)), forgiven, settled, or canceled debt of $600 or more is considered **taxable gross income**. Creditors issue **IRS Form 1099-C (Cancellation of Debt)** reporting the discharged amount to both you and the IRS.
1. The IRS Insolvency Exclusion (Form 982)
You do NOT have to pay income tax on canceled debt if you were **insolvent** immediately before the debt was discharged. Under IRC § 108(a)(1)(B), you are insolvent if your total liabilities (debts) exceeded the fair market value of your total assets immediately prior to the settlement.