IRS - RV-Dreams Community Forum

Ken & Sarah · RV-Dreams Family Member

IRS

Howard · Host

Not unbelievable at all. A company made a loan. They didn't get paid.

They knew they weren't going to get paid, so they "wrote it off". That is a forgiveness of debt and that is income to the borrower (i.e. the borrower got money from the lender as a loan, but when they didn't pay it back it became income).

This could happen in any debt situation. And it is a danger in debt consolidation or negotiations. If a lender agrees to a lower amount of repayment in "full settlement" of a debt, the unpaid amount of the debt is still income to the borrower. The lender is required to file form 1099-C, Cancellation of Debt and the borrower is supposed to report that on their 1040 as Other Income.

Before 2007, that applied to mortgage foreclosures as well. For example, a foreclosure occurred on a home worth $200,000 with a debt of $180,000. The lender sold the home for $150,000 and "wrote off" the other $30,000. That $30,000 is taxable income to the borrower. At least it was until the Debt Relief Act of 2007.

For 2007, 2008, & 2009 the canceled debt on a primary residence can be excluded from income according to that recent law. There are limits and nuances, but it would apply to most people.

There is also an "insolvency" exclusion, but it also comes with specific requirements.

Apparently there was no insurance in this particular case.