Is forgiven or settled debt taxable, and how does a 1099-C work?

Generally yes. When a lender cancels or settles $600 or more of debt, they file a Form 1099-C and the forgiven amount is usually treated as taxable income by the IRS, so a $10,000 settlement can trigger a tax bill. Important exceptions exist: debt discharged in bankruptcy is not taxable, and you can exclude canceled debt to the extent you were insolvent (your liabilities exceeded your assets) right before the cancellation, using IRS Form 982. Certain student loan forgiveness is also excluded. This tax hit is a major reason bankruptcy can beat settlement. If you receive a 1099-C, don't ignore it; report it and claim any exclusion you qualify for, and consider consulting a tax pro.