Like walkin, I had to read the IRS legalese guide at least a few times to figure it out. I got a spreadsheet out and did the math that way. All assets, cash-in-hand, accounts, stocks, etc. __minus__ all liabilities, debts, credit cards, loans, etc. If you still have assets ($1 or more) after that calculation, you __aren't__ insolvent. If you get a negative number or $0 (more liabilities than assets) you __are__ insolvent. It gets even more complicated if you have more than 1 settled account at different times. You'll need to do the calculation for each 1099-c in chronological order.

There are two main insolvency calculations:

1. The day right before the settlement was completed. This calculation __includes__ the forgiven debt in the settlement in the liabilities class. Ex. settled on 05/22/2013, do calculation of **assets-liabilities** as of 05/21/2013. If $5000 assets __minus__ $4000 liabilities=$1000 of assets still in possession, __not__ insolvent. If $5000 assets-$10,000 liabilities= -$5000 in assets, __are__ insolvent. **Important**: this calc uses the FAIR MARKET VALUE of assets (what someone would reasonably pay for asset x, i.e. ebay, craigslist, private buyer). So depreciation is factored. Cash is face value, but cars, clothing, electronics, etc. take the depreciated value.

How much you can exclude from the 1040 depends on amount insolvent vs. cancelled debt vs. FMV of assets. It's explained with examples in *IRS 4681* guide under **Insolvency**.

2. This calculation is done the day after a settlement to reevaluated any remaining assets and is used in the **Part II of the 982 form**. **Important**: this calc uses the COST BASIS VALUE of assets (what the asset cost you originally; i.e. retail value). Here you calculate assets after the settlement (at COST VALUE) __minus__ any liabilities, debt left over.

A positive number, for example $100, means you have to devalue remaining assets by $100. So now, for example, your wedding ring (e.g. asset/property) is worth $100 less (if selling in future), which would be **$100 on line 10a of 982.** You've declare to the IRS that your asset(s) is worth $100 less (or devalued by $100).

In another example, say $800 assets (cost basis) __minus__ $15,000 remaining liabilities/debt = -$14,200. Way more liabilities still remain. So on *line 10a* of my 982 I put "$0". Because you can't devalue property by a negative number; it's already "worthless". Congratulations, I'm still broke.

**Extra**: I believe the assets measured for calc 2 are the same as calc 1, you're just adjusting the value of the asset, (i.e. FMV vs "retail" cost), increasing the value of the asset to its "original value" for calc 2.

There are three options for **line 10a**, you list the smallest of: a)cost basis value of assets b)total cancelled debt c)cost basis of assets __minus__ liabilities. There's a section in the instructions that explain this. You'll have to look at your individual situation. Ex. a)$1k cost basis value of remaining assets b)$5K cancelled debt c) -$3k (cost basis assets __minus__ liabilities; e.g. $0) then c) is the smallest and that goes on **line 10a**. This is where spreadsheet formulas helps to decide which number you should write on line 10a.

IRS says if debt is forgiven, fine. But in exchange for forgiveness, in certain cases, they reduce remaining value from your assets (for when/if you sell them in the future). There is also a depreciation of real property in the 982, but that didn't apply to me, can't help there.

The 982 insolvency worksheet covers most assets and liabilities classes. Supposedly you don't have to mail it in with the 982, but it can't hurt and might avoid triggering an audit. Plus I kept all the of the spreadsheet math, receipts in case of audit. My spreadsheet was more granular than the 982 worksheet, I listed every single item. On the worksheet you can combine like things; like household goods, clothing, small electronics. Just keep the proof of calculations/worksheet in case of audit.

Anyone else, feel free to correct or clarify. I'll admit it is difficult to explain and the IRS instructions are wordy and unclear at best. Plus the IRS splinters the information, so you have hunt down 2 or more sources/manuals to get educated. **IRS ***4681 and 982 instructions* are the important ones here. Well organized spreadsheet helps a lot with the math.