Generally, a cancelled or forgiven debt for less than its full amount is considered as income for tax purposes (IRS Publication 4681). In cases of cancelled or forgiven debts following foreclosure or repossession, it is treated as a sale for which the debtor may realize gain or loss. If the amount forgiven is more than the fair market value (FMV) of the property it may also be realized as ordinary income from the cancellation and must report this in the tax return, unless certain exceptions or exclusions are applicable.

Cases of taxes involving cancelled or forgiven debt varies greatly and could be complex, so it is advisable to work with a CPA, a lawyer or best if a CPA-Attorney for better guidance in this matter.