Discussion:Debt Forgiveness for a Co-signer

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Discussion Forum Index --> Basic Tax Questions --> Debt Forgiveness for a Co-signer

Discussion Forum Index --> Tax Questions --> Debt Forgiveness for a Co-signer

Peachie2422 (talk|edits) said:

26 August 2008
Hi! I have a client who is a co-signer on a car loan. The other person defaulted on the loan, and now declared bankruptcy (therefore, the loan falls to the co-signer). My client filled out a voluntary repo form, and they did collect and sell the car. The balance due on the loan is around $13,000. She settled with the bank for $5000 by taking a loan out at the same bank in her name for that settlement amount. The question is, as a co-signer will she be responsible for the tax on the balance as debt forgiveness ($8000 income)? Could it be argued that the co-signer was not the original debtor and therefore, received no economic benefit from the cancellation? Should I just put this on her return as an in and an out with an explanation? If so, is there something to cite regarding this issue, or just state the case?

This just happened, so I am not sure that she would receive a 1099 for it yet, she just wants advice as to what if it does happen. Thanks.

Solomon (talk|edits) said:

26 August 2008
Do a search - this question has arisen previously.

Peachie2422 (talk|edits) said:

26 August 2008
Thank you for the reply. I must have missed it, as I searched this issue prior to posting and did not find anything specific to a co-signer. Can you direct me more specifically?


Kevinh5 (talk|edits) said:

26 August 2008
she got an economic benefit from the cancellation - she didn't have to pay it in full

co-signor was an original debtor - she signed at the time the car was bought

if she had paid the entire debt off she wouldn't owe any tax, tell her to quit bitchin', she is getting off easy

RoyDaleOne (talk|edits) said:

26 August 2008
In CCM 200023001, the Office of Chief Counsel advised that the discharge co-obligors of the full amount of a joint and several obligation by a creditor should not be treated as income to each co-obligor ofn the full amount of the discharged obligation. An appropriate allocation of the discharged indebtedness should be made between the co-obligors, based on all the facts and circumstances.

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