What is Cancellation of Debt?
Cancellation of debt occurs when atells a borrower that he or she no longer must repay a .
How Does Cancellation of Debt Work?
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 ., John Doe loses his job and
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 bankruptcy., but they too often do so under
Why Does Cancellation of Debt Matter?
Cancellation of debt can be a relief for borrowers, but it takes aof work to make it happen. Often, it is not a matter of simply refusing to pay. In many cases, borrowers must declare , which can have devastating consequences on the borrower's ability to rent apartments, get jobs and borrow elsewhere.
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.