[zred]

One thing that should be noted: if the debt is forgiven, the IRS counts it as income for tax purposes. As such, if you buy $5,000 worth of debt for $150 and forgive the debt, that $5,000 generally gets added onto their gross income.

http://en.wikipedia.org/wiki/Cancellation_of_Debt_(COD)_Inco...

Taxes are complicated enough that I wouldn't presume to say that this applies in all or most cases, but it's something to be aware of. I was only aware of it due to a USA Today article a while back mentioning it (http://www.usatoday.com/money/perfi/taxes/story/2012-03-02/i...). It's something to think about if you're interested in this topic.

[ThomasGokey]

My understanding is that this is different than a COD. From the perspective of the credit reporting agencies it will be considered the same thing as paying the debt in full. From the perspective of the government it will just look like someone paid their debt, not that they got extra money. But I'm not a tax expert or lawyer, this is just my best understanding after talking to a lot of people about it.

[smsm42]

I'd suggest you hire one, because it certainly looks like what IRS would consider income. If somebody - no matter who - forgives a loan for you, it is considered income. Otherwise nobody would pay any income tax as they would not have any income - they'd just have some loans that by some miracle are regularly forgiven. Every employer would have a loan forgiveness program instead of salary. I don't think IRS can be cheated as easily as that.