If you borrow money from a commercial lender and the lender later cancels
or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances.
When you borrowed the money you were not required to include
the loan proceeds in income because you had an obligation to
repay the lender. When that obligation is subsequently forgiven,
the amount you received as loan proceeds is reportable as income
because you no longer have an obligation to repay the lender.
The lender is usually required to report the amount of the canceled
debt to you & the IRS on a Form 1099-C, Cancellation
of Debt.
RESOURCES: Debt Cancellation
Questions and Answers on Home Foreclosure and Debt Cancellation
FTC Bureau
of Consumer Protection - Consumer Information: Credit & Loans
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