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In most situations, if you receive a Form 1099-C, "Cancellation of Debt," from the lender that forgave the debt, you'll have to report the amount of cancelled debt on your tax return as taxable income.

It is not uncommon for a creditor to forgive a debt in one year but be faced with claims from the prior debtor in later years based on some aspect of their business relationship.

Lenders or creditors are required to issue Form 1099-C, Cancellation of Debt, if they cancel a debt owed to them of $600 or more. Generally, an individual taxpayer must include all canceled amounts (even if less than $600) on the "Other Income" line of Form 1040.

"If you've had debt forgiven by a creditor ? even if only in part ? the amount of your debt forgiveness will be taxable, unless you qualify for an exemption," says Logan Allec, certified public accountant in Santa Clarita, California, and creator of the personal finance site Money Done Right.

The statute of limitations on debt in Texas is four years. This section of the law, introduced in 2019, states that a payment on the debt (or any other activity) does not restart the clock on the statute of limitations.

The creditor wins by default, and can get a court judgment against you for the amount you owe and try to collect on the judgment by seizing your property. By law, your homestead and certain kinds of property and income are exempt.