Cancellation of Debt
The cancellation of debt or is simplified as COD is defined as the forgiving of a debt from a lender without consideration. As the funds therefore belong to the debtor it is considered as an income.
The consequence of this is that they are subject of tax and are also to be reported.
The tax will depend on the amount of funds that is borrowed and forgiven by the lender.
Certain amounts of CODs are not subject to tax due to its small amount.
Loosely illustrated if you have borrowed $1000.00 from a lending party and still have $500.00 to repay but are unable to due to circumstances, the remaining $500.00 that is forgiven is subject of taxable and reported income.
Despite how forgiving it is, there are certain types of debts that are not subject to COD.
This includes: corruption and bankruptcies.
The process of cancellation of debt
The IRS is central in the reporting system of the COD. Both lenders and debtors are obliged to report to the IRS by filling in a form that has all the details.
The form you are looking for is the 1099-C, Cancellation of Debt. This will report to the state who is conducting the forgiveness and who is applying for the cancellation of debt.
Additionally for the debtor, the Form 982 is also to be filled in. this states the amount of funds you are freed from paying and the consequent taxes as income.
Both forms and any additional forms are accessible online. Alternatively you can pay a visit to the nearest IRS office and acquire for the forms there. They will be happy to help.
However, should this not be an option for you, the form can be delivered to your home by ordering through phone in advance.
The papers should reach you in no more than 10 working days. Hence if you are under a time limit, be sure to start the process as soon as possible.
Impacts of COD
At the moment, the issue of COD is still contextualized in the situation of third-world countries. Most argue that the cancellation of debt will help bring development into a complete realization and create betterment as a whole.
However the pros and contras are still on-going.
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It is still too soon to conclude the answer. What is often forgotten is that, in the context of daily life, cancellation of debt also plays a great role for households.
The lift of this debt has shown, in the past few years, an increase of primary needs fulfillment, more funds spent on education and a betterment of life.
If this is an option you are currently looking speak with your lender to bring this into realization.