Discussion: Of course it should be taxable income

In some cases; otherwise instead of paying my salary, my employer gives me a loan in the same dollar amount, then forgives the debt; presto, tax-free income.

Your point is that the law is not fit for a case like the one you mention, which I don't necessarily disagree with. Or rather, that the amount of the debt in this case is a kind of nominal figure because he was never going to pay $36K anyway, so the debt forgiveness should be based on some smaller amount. But I do see how it's hard to figure what that should be: it should be more than the original debt (because he got forgiven interest too) but probably not tens of thousands more (because the bank never thought they were going to collect that). The economically correct amount to write off is something like the maximum internal value the bank ever thought the loan was worth to it, but you can't observe that or make rules based on it.

So, assuming the tax liability can be forgiven in cases of genuine hardship, this law actually seems like it's making the best of an impossible situation. (If you don't think so, how would you design it better without allowing the kind of tax cheating my first paragraph suggests?)

The problem is that cancelled credit card debt included in income includes the interest part, and for credit card debt that can be a large percentage of the total. And because credit card interest in not deductible, then credit card interest when cancelled is taxable. If student loan debt was cancelled, then the interest part would not be taxable.

That notwithstanding, your point is valid.

My overall view of the tax code, and the variety of humanity that has to deal with it, is that there is both areas of fairness and areas of unfairness in the code, and both honesty and fraud among those dealing with it. And that goes for all income levels. And I don't see any of that changing.

But it's interesting to look at specific cases and specific circumstances, and what the law says and how behavior reacts to that. I am often quite amazed.

Could it be spread over the last three years, or however long it took to rack up the debt? Would that make a difference?

Nope, don't have incoming averaging any more, except for farmers. Taxable in the year the deal was done.

But unlikely he will ever pay anything. Can't get blood from a stone.

And the further problem is not taxing the original debt and interest, but the bank drastically raising the rate and just piling it on. Then the income for written off p&i becomes ridiculous, as in this case.

Presumably good for the bank, and a big net loss for public revenue. I wonder if the bank can jack up their paper loss high enough that the tax savings offset the loss from the delinquent principle. The taxpayers wind up paying for the stuff the guy charged on the card, by way of lost revenue from the bank.

You'd think so, but before the bank can take a paper loss, they have to have a paper profit. If they raise the interest really high to take a big loss, first it shows up as income. Then they write it off. It nets out at zero for them. So I don't see what they get out of it. Except to be mean. Or to make a lot off of someone who actually pays them.

You can study bank accounting and come up with your own conclusion, but I think you will find the gist of some of what was written above doesn't get at the way the accounting is done. Specific practices may vary somewhat from bank to bank with respect to timing and when a loan goes into various classifications, but generally once a bank classifies a loan as nonaccrual and considers collection to be doubtful, unpaid accrued interest is reversed and charged against current period interest income. Future interest collected will be applied to reduce the outstanding principle. A bank does not benefit from delinquent borrowers any more than you would benefit from a customer that didn't pay their bill for goods delivered or services rendered.

So I guess that means that when the interest gets added, it means somebody has to pay taxes on it, and the Treasury wins either way? (Except when the one left with the tax bill defaults on it, like in this case?)