Best Answer by ninasgramma

Your insolvency is the difference of your liabilities and the fair market value of your assets just before your debt was cancelled. Example 1: Home purchased for $100,000 with a $80,000 mortgage. Home is now worth $250,000 and your mortgage is $75,000. The only asset you have is your house. The only other debt you had was the credit card debt. Liabilities: $75,000 + $40,000 = $115,000 Assets: $250,000 You are not insolvent, your net worth is $110,000. Example 2: Same situation as above, but you have another $150,000 of debt owed in addition to the credit card debt. Liabilities: $265,000 Assets: $250,000 You are insolvent $15,000. You must include $25,000 of the debt forgiveness in income. Obviously your situation will be much more complicated and you need a tax professional to assist you if you want to reduce your taxable cancellation of debt through insolvency. ... See all 3 answers