Debt Cancellation Disputes

About Debt Cancellation

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Debt cancellation is when a debt is completely forgiven, and the debt has been released.

Debt cancellation can not only be applied to an individual, but in certain circumstances business entities are also eligible.

However, be aware that certain classifications and types of debt are unable to be forgiven or discharged, for example student loans.

Debt cancellation is also often referred to as :

  • Discharge of Debt
  • Cancellation of Debt
  • Discharge of Indebtedness

Canceled Debt and Taxable Income

When a debt that is owed by a creditor becomes canceled, that forgiven amount can often times be considered as a form of gross income for the debtor. In other words, a canceled debt should be reported to the IRS in your tax statements, and you can expect that it is likely to be counted as a form of income.

For instance, let's say a bank loaned $35,000 to a debtor, then the debtor partially paid back $25,000 of that loan. The remaining $10,000 of the loan doesn't get repaid, and the bank canceled the rest of the debt. In this case, that canceled debt amount would be treated as taxable income for the debtor.

Luckily, not all discharged debts are considered taxable income.

The guiding principles of tax law indicate the following types of debt cancellations are not considered as taxable income:

  • Cancellation of debt from business real estate indebtedness
  • Cancellation of debt from farm indebtedness
  • Cancellation of debt from taxpayer insolvency
  • Cancellation of debt from bankruptcy proceedings

True Debt

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Gifts, Cancellation of Debt, and True Debt

In order for a debt to be considered a form of taxable income, it must first be classified as a true debt. A true debt, is a debt that includes a legally enforceable obligation for the repayment for the debt.

Thus, a cancellation of debt is not considered a form of taxable income if it is not a true debt.

Therefore, a gift is not a form of income that has an expectation to be repaid, as it was never implied that it was to be repaid, combined with the fact there was no legally enforceable obligation to repay the gift, so it is in fact, not a true debt, and would not be counted as a taxable income in this case.

Now, in the instance above, instead of it being a gift, perhaps it was a loan from a family member for $1,000, and included a repayment schedule that tallied interest. If payments were being made on the loan, but midway through the repayment it was decided to discharge the duty to make repayments, the canceled payments could be considered a gift in some jurisdictions. And compounded with the nature of the loan being from a direct family member, the cancellation of the remaining debt would be considered a gift for tax purposes.

Although, generally the consideration of a the cancellation of a debt to be counted as a gift if the parties involved have a close personal relationship, such as relatives and family members. From a business context, canceled debt may or may not be counted as a taxable income depending on if the debt was actually a debt, or if it turned out to be an equity. If you are unsure about the nature of your debt, please Contact our offices to speak with a lawyer about your case or business debt.

Reclaimed Canceled Debt

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Generally, debt cancellation determination is based upon the facts relating to the transaction. A court may even consider the prior dealings of all parties involved, and how these dealings and debts related from past interactions. After such considerations, you may be given a confirmation of cancellation, which would legally release you from being on the hook for the debt. Once you obtain the confirmation of cancellation, your liability to be demanded repayment of the loan should disintegrate.

Thus, once a confirmation of cancellation has been confirmed, it is advised that you always get a written confirmation from the creditor indicating the cancellation of the debt. Reliance on a strictly oral agreement is not sufficient to protect you. You should always request that the agreement be finalized in written form so that it becomes legally binding.

It might be in your best consideration to have our law offices draft the document of cancellation request so that all the relevant provisions can be covered on your behalf. After the fact, this document could then be held by you as proof of the indication of the cancellation of debt. Such possession of this document alone should diminish any future lawsuits based on attempts to reclaim a debt that according to your knowledge had already been canceled.

Seeking Legal help with Debt Disputes from LKDLAW PC

Lawyers and the Disputes over Cancellations of Debt

When faced with debt cancellation disputes, it is likely going to be in your best interest to pursue the services of a lawyer that has experience. A finance lawyer is going to be focused on making sure all of your interests are covered, and can draft and finish any of the requirements needed for dealing with cancellation statements. As with most laws, they vary from region to region, and thus it is best to seek lawyer services to ensure that all of your angles are covered, and the finality and longevity of a canceled debt ensures.