Last year, my husband and I went through a really tough financial period. I had been injured and couldn't work, and my husband was changing jobs. We fell behind on our mortgage payments for the house we were buying on contract.

The lawyer of the elderly gentleman who held the contract started foreclosure proceedings. After meeting with the contract holder, we wrote up a new contract for the exact amount owed (just changing the payment amount) and we haven't missed a payment since. The contract holder wasn't concerned about filing the new contract at the court house, as he said he held several contracts that had never been filed. He told us he had contacted his lawyer and that everything was handled.

Today we received a 1099-C from the lawyer for Cancellation of Debt, even though we still are paying the mortgage payments, taxes, and owe the entire amount under the new contract.

How do we handle this on our income tax? Even though we are still paying, will this be
Considered income under forgiven debt?

Contact the contract holder and meet with him WITH the lawyer present.

Then hammer out an agreement to get the Form 1099-C rescinded.

If you do not, the IRS will EXPECT you to pay taxes on this 1099-C income.