Debt forgiveness may result in taxes owed. Under federal tax law, gross income generally includes cancellation of debt income when a lender forgives all or part of a debt. However, there are exceptions. Debt discharged as part of a Chapter 7 or Chapter 13 bankruptcy case is generally excluded from income. Also, it may be nontaxable if you can prove to the IRS that you were insolvent when your lender canceled your debt. In addition, forgiveness of certain student loans and cancellation of debt due to the borrower’s death or total disability are usually nontaxable. After a debt is canceled, your lender may send you a Form 1099-C detailing the amount. Contact us if you have questions.
