Credit Counseling Group Warns of Tax Bills on Forgiven Debt

Consumers who get part of a balance wiped out through a negotiated deal may owe the Internal Revenue Service on the difference, Bruce McClary of the National Foundation for Credit Counseling said in an interview published by CNBC on October 14, 2026.

McClary, a senior vice president at the nonprofit group, drew a line between two terms often treated as one. Settlement is the bargaining with a creditor or collector to accept less than the full balance, he said, while forgiveness is the cancellation of what is left once those terms are met. Agreements should be in writing, he said.

When a creditor writes off $600 or more, it generally files a Form 1099-C with the IRS, and the canceled sum can be treated as taxable income, subject to exceptions. "People are so focused on the debt relief outcome that they sometimes overlook the part about a tax bill for the debt that was forgiven," McClary said.

He also cautioned that an account marked charged off can still be pursued legally. Settled accounts remain on credit reports, with negative entries lasting as long as seven years, according to CNBC.

This story was first reported by CNBC.