Final answer:
Individual taxpayers are not taxed on COD income if their debt is forgiven in a bankruptcy. Bankruptcy proceedings are governed under Title 11 of the U.S. Bankruptcy Code, which provides exceptions to the general rule that forgiven debts are taxable.
Step-by-step explanation:
Individual taxpayers are indeed not taxed on their cancellation of debt (COD) income if their debt was forgiven as part of bankruptcy proceedings. According to the U.S. tax code, a discharge of indebtedness in a Title 11 case, such as bankruptcy, is one of the exceptions to the rule that a discharge of indebtedness is considered taxable income.
A Title 11 case refers to cases under the United States Bankruptcy Code. Specifically, this means that if an individual files for bankruptcy and a debt is discharged in the process, that person does not have to report the forgiven debt as taxable income.
Federal tax law provides several exceptions to the general rule that forgiven debts must be included as income. In addition to the bankruptcy exception, other circumstances, such as insolvency or certain qualified farm debts, may also result in the exclusion of COD income from taxable income.