What typically must happen when a debt is canceled?

When a debt is canceled, the amount that is forgiven typically must be included in the borrower's income for tax purposes. This concept arises from the Internal Revenue Code, which considers canceled debt as income because the borrower has effectively gained financial benefit—essentially receiving money or services without a corresponding obligation to repay that amount.

In the case of a canceled debt, unless specific exclusions apply, such as insolvency or certain student loans, the Internal Revenue Service (IRS) requires taxpayers to report the forgiven debt as income on their tax return. This is based on the principle that individuals should not benefit from a financial windfall without it being taxable.

The other options do not align with standard tax treatment regarding canceled debts. For instance, the idea that the borrower never has to report it is incorrect, as this goes against the taxation principle applied by the IRS. The notion that the lender will keep the debt on record does not pertain directly to the borrower's tax obligations upon cancellation. Lastly, the requirement for the borrower to sue the lender is irrelevant to the treatment of canceled debt for tax purposes.