Is cancellation of debt always taxable?
Cancellation of debt is not always taxable, although when your debt is cancelled and you save more than $600, the creditor is required to send you what’s called a 1099-C form. This form reports the amount of the debt cancelled through the settlement, and that money may be considered taxable income.
Whether cancellation of debt is going to be a taxable event for you is probably best left to your CPA to decide, but the general rule is that if you have a positive net worth at the time of the debt settlement, the amount of money you saved through the settlement will be taxable. If you have a negative net worth at the time of the debt settlement, it is not.