The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

IRS: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation:

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable...

If you borrow money and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. 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, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender.

I have to say the last couple sentences there make perfect sense. A loan doesn't count as income because I have to repay it. So then, if it turns out I don't have to repay it, I guess it does have to count as income.

Here's what doesn't make sense. It doesn't make sense when everything that happens in the economy drives people to use more and more debt, until suddenly debt breaks the camel's back and the economy practically shuts down. It doesn't make sense to push accumulated debt to such a high level that the economy can no longer even grow, and then turn around and say you have to pay income tax on any debt that's forgiven. That makes no sense.