What are the tax consequences?

Banks are required to report canceled debts exceeding $600 to the IRS and you are supposed to report the same as income on your annual tax return. However, the IRS permits you to write off any “income” from canceled debts up to the amount by which you were “insolvent” at the time. So unless you have a positive net worth, which is unlikely if you’re deep in debt, then you ordinarily won’t have to pay taxes on the forgiven amounts. You should consult your own tax advisor for advice specific to your situation.

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