Bankruptcy and Cancellation of Debt Income

Yes. Debt cancelled in a bankruptcy case under Title 11 of the U.S. Code is excluded from gross income, so it does not create taxable cancellation of debt income [1].

The exclusion is not free — the taxpayer must reduce certain tax attributes (basis, credits, NOL carryovers, etc.) by the excluded amount, reported on Form 982 [1]. For bankruptcy or insolvency discharges, the taxpayer can also elect to apply the excluded amount first against the basis of depreciable property before reducing other attributes [1].