Can anyone help me with a question about Disability and student loan forgiveness?

[PoliticAverse]

2. Insolvency...

From: http://www.irs.gov/publications/p4681/index.html

(see the "Insolvency Worksheet" in the document)...

Insolvency

Do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities was more than the FMV of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Liabilities include:

The entire amount of recourse debts,

The amount of nonrecourse debt that is not in excess of the FMV of the property that is security for the debt, and

The amount of nonrecourse debt in excess of the FMV of the property subject to the nonrecourse debt to the extent nonrecourse debt in excess of the FMV of the property subject to the debt is forgiven.

You can use the Insolvency Worksheet, found later in this publication, to help calculate the extent that you were insolvent immediately before the cancellation.