Client Resource Center

Practical answers for your questions

38 E. Lancaster Avenue • Shillington, PA 19607
Phone: 610-775-7655

Is Cancelled Debt Income?
You might be surprised by the answer.

Question: If a debt I owe is cancelled, is that income to me?

Answer: Cancelled debt is included in income unless it is specifically excluded by some provision in the tax code. Thankfully, certain types of debt forgiveness are generally excluded from income (e.g., discharge in bankruptcy under Title 11, a discharge when the taxpayer is insolvent outside of bankruptcy, qualified farm indebtedness, and qualified real property business debt).

Under special circumstances, some types of student loan cancellations are also excluded from income. A common example of this is student loan debt forgiveness when you work in an approved government incentive program.  

Before accepting a debt forgiveness offer from a bank or other source, please understand the tax ramification of accepting the terms before you sign.