Sometimes a judge will decide to cancel a student’s debt. This is lagal for hardship cases.
What students do not understand is this: the IRS regarded a canceled debt as taxable income.
This young woman went on total disability. It was a legitimate cause. She had $91,000 in student debts. Now she owes the IRS $26,000 and the state of New Jersey $5,000.
She might have owed more to the IRS if she had not worked in a field that got legitimate debt deferrals.
She has had most of her small intestine removed. She had a pulmonary embolism. Se needs 12-hour-a day IV feeding. Tough luck, but she still owes taxes.
No one told her this was taxable income.
There is a form for this: 1099-C.
There is no tax break for disability. “In fact, the Department of the Treasury has specifically stated that student loans cancelled due to the Death and Disability Discharge (Section 437(a) of the Higher Education Act of 1965) are taxable.”
She tried calling the IRS for assistance. The first time she called, she says the IRS representative hung up on her. The second time, she says she waited on hold for over an hour and was then told to call back after she filed her tax return. She claims that ultimately she was warned that if she couldn’t pay the amount due, the IRS would put a tax lien on her house and report her to the credit reporting agencies. (We’ve reached out to the IRS a number of times on this and other issues relating to the 1099-C, but to date haven’t gotten a response.)
She is not alone.
Once entrapped by student debt, there is no escape.