1099 question

It is still money that you owed to a creditor; therefore, when forgiven, it is considered income. In very general terms, the fees and interest would have been income to the creditor anyway...so a different person ends up with the IRS bill.

I see your point but I'm afraid the IRS sees it different. It is all money that you owed that you no longer have to pay for -- whether it was interest or fees or what not, you are receiving a benefit by not having to pay for it. If you paid every penny you owed, then the company would report it all as income* and pay tax on it.

But since it is forgiven, the company reports it as a loss and reduces their taxable income -- ie the company gets out of paying the tax on your remaining balance. So the IRS says "somebody has to pay the tax" -- and since you received the benefit of having that remaining balance forgiven, you get to pay the taxes on it.

*(It's a little more complicated accounting-wise, because these companies work on an accrual basis and they actually reported and paid tax on the income during the period they earned it, so them taking a loss now is really just reversing the income they reported years ago ... but in the end all the numbers have to balance out and this is the legal way of adjusting their books).