bsrsharma, you make it more complicated than it needs to be.
For simplicity, think of it this way… You own a house free and clear and want to borrow $10 million pledging your house as collateral. I agree and give you the money. I’m the lender (but not a regulated financial institution) and I’m free to lend you any amount I want.
You default. What can I do? The most I can do is take your house and sue you for the money. But as the lender I don’t even have to do that. I can just write-off the bad debt and call it water under the bridge (if I’m a corporation with enough income, I could write off the full amount as bad debt. Even individuals can carry mortgages and write off bad-debt on their tax returns).
If debt forgiveness were not taxable, you’d see a lot more of these kinds of non-taxable transactions. The law firms and estate planners are already sharpening their pencils.
