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Tax Glossary: Cancelled Debt

Posted by McDonald & Osborne Posted on Oct 13 2015

Cancelled Debt : Generally, when a debt is canceled or forgiven, the borrower who benefits is considered to have received taxable income equal to the amount of the canceled debt. There are exceptions. For example, some student loans contain agreements that debt will be forgiven if the borrower works for a certain period of time in a certain profession. Also, forgiven debt is not taxable to the extent the borrower is insolvent (that is, whose liabilities exceed his or her assets) or when the debt is waived by a bankruptcy court. You should receive a 1099-C form showing the amount of any cancelled debt; be sure to check to see if you qualify for any exceptions before reporting the amount as taxable income.