According to Los Angeles Bankruptcy Lawyer Michael H. Raichelson, if you owe a debt to someone else and they cancel, reduce or forgive that debt, the canceled amount may be taxable. If you borrow money and the lender later cancels, reduces or forgives that loan, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. This is the dirty little secret that debt consolidation companies will not tell you. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven or reduced, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender.

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