Cancellation of Debt
What it is:
Cancellation of debt occurs when atells a borrower that he or she no longer must repay a .
How it works/Example:
Let's assume that John Doe borrowed $100,000 from Bank XYZ for a luxury car. In the middle of the five-year defaults on the loan. After lengthy negotiations, Bank XYZ cancels the remaining $30,000 loan balance, repossesses the car and sends him a Form 1099-C for the $30,000, which requires him to pay on the canceled .
Ultimately, for individuals, a judge usually decides whether to cancel debt. The judge can deny the cancellation if the debtor failed to keep adequate records, failed to adequately explain the loss of any assets, committed a crime, disobeyed court orders or did not seek counseling.
Companies often negotiate for debt cancellation with , but they too often do so under bankruptcy.
Why it matters:
Cancellation of debt can be a relief for borrowers, but it takes a
Additionally, the IRS typically views canceled as to the borrower. Accordingly, borrowers who get their canceled often incur large tax bills if the cancellation occurs outside of bankruptcy.