Which of the following accurately completed the following statement? An individu

Question

Which of the following accurately completed the following statement? An individual who is not personally liable for a debt does not have ordinary income from the calcellation of the debt unless: A. The individual retainsa the collateral, B. The individual retain the collateral and the lender offers a discount for the early payment of the debt, C. The individual returns the collateral to the lender, D. The individual returns the collateral and the lender agrees to a loan modification, reducing the principle balance of the debt

Explanation / Answer

If you borrow money and are legally obligated to repay a fixed or determinable amount at a future date, you have a debt. You may be personally liable for a debt or may own a property that's subject to a debt.

If your debt is forgiven or discharged for less than the full amount you owe, the debt is considered canceled in the amount that you don't have to pay. The law provides several exceptions, however, in which the amount you don't have to pay isn't canceled debt.

Cancellation of a debt may occur if the creditor can't collect, or gives up on collecting, the amount you're obligated to pay. If you own property subject to a debt, cancellation of the debt also may occur because of a foreclosure, a repossession, a voluntary transfer of the property to the lender, abandonment of the property, or a mortgage modification.

In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs. The canceled debt isn't taxable, however, if the law specifically allows you to exclude it from gross income.

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