- 1). Determine the amount of debt to forgive. You do not have to forgive the entire debt. Work out a compromise with the debtor to forgive a portion of the amount owed in exchange for the debtor paying the rest of the debt, if possible.
- 2). Write a contract between you and the debtor if he is to make payments on part of the debt. Include the total amount of debt owed, how often he is to make a payment and for how long the payments are to continue. Specify the amount of the payment. Write a clause stating that you will forgive the remaining debt after the debtor fulfills the payment terms. Include the debtor's contact information and his Social Security number in the contract.
- 3). Write a receipt for the debtor stating the amount of forgiven debt with the words "Paid in Full" when you write off the debt. Get the debtor's mailing address and Social Security number if you are writing off the entire debt.
- 4). Call the Internal Revenue Service at 800-823-3676 to order a Form 1099-C. Complete the form, listing the amount of forgiven debt and other required information. Mail Copy "B" to the debtor, keep Copy "C" for yourself and file Copy "A" with your taxes.
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