Cancellation of Debt Exclusion
If a debt you incurred is successfully cancelled by the lender the amount of the debt is generally considered a part of your gross income for the year and is therefore added to any other income you may have received. The amount is listed on a 1099-C that you receive in due course.
You may however be entitled to several exceptions and/or exclusions that make the cancelled debt amount non-taxable and do not require its inclusion in your gross income.
For example, the cancellation of the debt have have been a gift from the lender. Recipients of student loans may also have their debt amount excluded if they work for a specific period in a certain profession, usually one related to the lender’s concerns.
In certain years, a government decree may exempt you from having to include the cancelled debt in your income. This was the case in 2007 when the Mortgage Forgiveness Debt Relief act made it possible for taxpayers subject to foreclosure to exclude the up to $2,000,000 of their forgiven mortgage debt from their income.