Having debt you can't pay is taxing, but walking away from your debts can be even more taxing. In general, if you owe money and it’s eventually written off, the destroyed debt is taxed like income, but there are a few exceptions to this rule. Let’s take a look at a few.
Insolvency. If you owe more than you own, forgiven debt isn’t counted as income. In other words, do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities was more than the fair market value of all of your assets immediately before the cancellation.
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