This is the beginning of a 15 part series on Cancellation of Debt.

With the plunge in the economy over the last several years we, as tax professionals, have seen an increasing number of our clients coming in with cancellation of debt, foreclosures and bankruptcies. From canceled credit cards, repossessed cars, defaulted payday loans, and bad business loans, to our clients losing their homes, we have seen it all. What most clients don’t realize is that along with these issues come tax consequences. It is our job, as tax professionals, to help reduce or eliminate those consequences to the greatest extent possible.

We will discuss and review the following procedures:

1. Cancellation of Debt Income (CODI) Determination
2. Deemed Sales
3. Foreclosures and alternatives
4. Bankruptcy issues relating to CODI
5. Exceptions and Exclusions from CODI
6. Reduction in Attributes
7. Cancellation of Debt and Entities
8. Cancellation of Debt and your state income tax return

We will also be reviewing current court cases involving these subjects and doing some case studies as we work our way through the material.

But, first, let’s start with some useful definitions of the types of debt and common terms used in our subject matter:

1. Recourse debt – This is debt the debtor is personally responsible for repaying even if some collateral was seized. The debtor must repay any amount in excess of the collateral.

2. Non-Recourse debt – This is debt the debtor is not personally responsible for repaying and the debt holder can not seek repayment in excess of the value of any collateral seized.

3. Secured debt – This is debt that is guaranteed by collateral such as a piece of property, a piece of real estate or a vehicle. If the debt is defaulted this property may be seized to repay the debt in full or in part.

4. Unsecured debt – This is debt that is not secured by anything other than the debtor’s promise to repay, like credit cards, personal signature loans, student loans, and pay day loans.

5. Foreclosure – Foreclosure is the legal act of “calling in” a loan where the debtor has not adhered to the agreement.

6. Repossession – Repossession is the physical act of seizing the property used as collateral for that loan.

7. Collateral: A piece of property that is pledged by the debtor to secure the repayment of a loan.

8. Mortgage: The transfer of an interest in a property, in writing, to the lender as security for the repayment of a loan. This is mainly to do with real property.

9. Realized Gain: The actual gain on the sale/disposition of an asset .

10. Recognized Gain: The taxable amount of the Realized Gain.

Next:  Part 2 – What is Cancellation of Debt?