Your personal loan is considered a debt. As long as you’re on your way to paying it off, you shouldn’t worry. However, if part of your loan is canceled, you may end up in a very different situation, which can turn out to be costly.
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What happens if your personal loan is canceled?
If you are behind on payments or can’t pay your loan, you may be sent for collection and eventually default on your loan. If you work with a credit management agency or if you file for bankruptcy, you could set up a payment plan or part of your loan could be canceled.
In these cases, the lender issues a Debt Cancellation (COD) on the canceled amount. A COD means that you are no longer responsible for repaying your loan. You will receive a 1099-C form from your lender that you will need to submit with your tax return when you file and report the canceled amount.
Let’s say you borrow $ 10,000. You pay the first $ 5,000, but you face an unexpected financial problem that makes you unable to pay the last $ 5,000 of your principal. The lender can cancel the remainder of your loan, which is $ 5,000. What does this mean to you? Well, in tax season you will have to report the remaining $ 5,000 as income which means you will owe taxes on that amount.