What is Cancellation of Debt?
If you borrow money from a lender and the lender later cancels or forgives the debt, the cancelled amount is considered to be taxable income, depending on the circumstances. When you borrowed the money, the loan proceeds created an obligation to repay the lender and were not considered income. However, when the loan obligation was forgiven, the loan proceeds become income because there is no longer an obligation to repay the lender. The IRS requires your lender to report the amount of the canceled debt to you on a Form 1099-C.
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