People are becoming aware of the potential of having to pay ordinary Income Taxes on the amount of debt they owe that is forgiven.  This is being seen in both mortgages for non-primary residential property and credit card debt.  If you are in this situation you need to be aware of the “insolvency” rules.  If you are essentially insolvent* both before and after the debt was cancelled you probably would not owe any tax on that amount.  But you have to attached the right information with your tax return.

*Insolvency is determined by listing the Fair Market Value (FMV) of all of your assets other than retirement funds (actual 401(k)’s and IRS’s).  From that amount you deduct all of your debt.  If you owe more debt than you have in assets both before and after the debt was cancelled – then you qualify for the insolvency exemption.

Again, every situation is different.  Work with the professionals in determining your particular potential tax liabilities and options BEFORE you negotiate for debt cancelation.