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August 2009 » Cancellation of Debt Income Can...
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Michael L. Holland, PhD, and Leonard G. Weld, PhD
Income from the cancellation of debt (COD) is a growing problem for many American taxpayers because the volume of defaulted debt is increasing. The current economic downturn was triggered by an unprecedented number of subprime home mortgages that began to go into default in late 2007. Home prices are falling nationwide for the first time since the Great Depression of the 1930s. There are additional debt problems to come. Wall Street experts predict that in addition to the $1 trillion of subprime debt that has been defaulted, two other mortgage instruments that were issued to creditworthy buyers are very likely to produce $1.6 trillion of defaulted debt. As the asset bubble continues to deflate, debt defaults will spread to commercial real estate markets. The same faulty decision making that led taxpayers with good credit ratings to take on large amounts of debt in very risky adjustable rate mortgages also affected commercial borrowers. These losses are expected to be huge.
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