An individual who is not personally liable for a debt does not have ordinary income from the cancellation of the debt unless what occurs?

An individual who is not personally liable for a debt does not have ordinary income from the cancellation of the debt as long as they do not retain the collateral. When the individual returns the collateral to the lender, it signifies that they are no longer benefitting from the debt, and thus any cancellation of that debt is treated differently for tax purposes.

If the debtor returns the collateral to the lender, the transaction may not result in a cancellation of indebtedness income. This is due to the fact that the return of the collateral demonstrates that the individual is effectively relinquishing any claim they had to the benefit of the debt, which aligns with tax regulations regarding cancellation of debt income.

In circumstances where the individual retains the collateral or receives modifications, other implications may arise that could lead to taxable income, but returning the collateral removes them from being liable and typically does not generate tax consequences linked to cancellation of debt income.