The Scotland international joined the Black Cats last year on a short-term deal, but that came to an end in January.
O'Neill was keen to keep him, but he did not stand in his way when Alex McLeish at Nottingham Forest showed an interest and was ready to offer him a long-term deal.
However, McLeish failed to finalise a deal with McFadden and has since left the City Ground - so a move back to Sunderland is on the cards.
Black Cats boss O'Neill confirmed to the Sunderland Echo: "We let James' situation run past the transfer deadline and I think he went down to Nottingham Forest before McLeish departed.
"But obviously events have changed that situation and I don't know what's happened since then.
"I'll speak to the agent though and see where we stand."
As 29-year-old McFadden is a free agent, he can re-join Sunderland outside the window.
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