<p>"When Kim Thompson’s $91,000 student loan balance was cancelled due to total disability, she thought she had put at least one of her problems behind her. Instead, she traded it for another: a massive debt to the IRS.</p>
<p>Two years ago, Thompson, who lives in New Jersey, was diagnosed with a tumor that eventually led to the removal of most of her small intestine, a pulmonary embolism, and 12-hour-a-day IV feeding sessions. She retired from her job on a disability pension in July 2010, and was able to get her federal student loans cancelled.</p>
<p>There was no mention, however, that the debt would be reported to the IRS as Cancellation of Debt Income (CODI).</p>
<p>‘They didn’t tell me it was taxable income,’ she says. ‘I had no idea.’</p>
<p>The IRS considers most types of cancelled debt taxable income. Lenders must report cancelled debts of $600 or more to the IRS on a 1099-C form. The IRS estimates some 6.3 million 1099-C’s for all types of debts, including student loans, credit cards, mortgages, etc. were filed this year reporting CODI for the 2011 tax year." …</p>
<p>Good heavens, instead of “canceling the debt” why can’t there be an “insurance” of sorts that pays the student debt when one dies or is disabled? Or would that be “income” too?</p>
<p>What a way to make a sick person even sicker! Imagine the stress!</p>
<p>Wonder how the IRS plans to get $$$ from someone who is totally premanently disabled due to health conditions? On the one hand, it makes sense that if the borrower gets forgiven his/her debt and it gets written off by the lender, it IS income to the borrower who got the “free money.” On the other hand, for borrowers, the reason it was written off is because the money is long gone and the borrower has no apparent ability to repay. That does indeed sound VERY stressful. I guess in such situations, one could see what deal the IRS is willing to make about possibly accepting small installment payments or similar.</p>
<p>They will not collect but she will have a judgment filed against her. There is a good chance that she could end up getting the debt forgiven under IRS reg.</p>
<p>I thought anyone who is in bankruptcy or insolvent will be able to exclude cancellation of indebtedness income. So yes, she gets the 1099, but she I think she would be able to exclude the income under IRC 108.</p>
<p>There is, in fact, insurance to cover student debt. A basic disability income policy can replace much of your total income, tax free. Use the benefits to pay your bills, including student loan payments.</p>
<p>Cancellation of debt is not income when the person is insolvent. I too think she would have had a good chance of this. If she didn’t trust her accountant, she should have gotten another one. I would never, ever trust the advice of a random IRS clerk on a $26,000 tax bill…or much else.</p>
<p>Otherwise, cancellation of debt as income is a concept with which I completely agree. I have clients get all bent out of shape because they had $15,000 of credit card debt forgiven and then they owe tax on it. What? That <em>is</em> income!</p>
<p>It is easy to set up repayment plans with the IRS and they base payments on available income. Their interest rate is very low. They will place a lien. It will never be paid.</p>
<p>I hate media spin. Even if she does owe tax, she still had a $60000 (net) gain. Although I feel sorry for this particular person, it’s yet another example of people who dug their own hole with student debt. I am strongly against forgiving student loan debt.</p>