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In a settlement, does the extinguishment result in a gain or loss for the debtor?

Generally, a settlement on extinguishment of debt will result in a gain for the debtor and a loss for the creditor. A gain occurs for the debtor because the fair value of the asset exchanged will be less than the outstanding balance on the loan (i.e. carrying value of the loan).

From the creditors perspective, they would accept an asset with a fair market value that is lower than the outstanding portion of the debt, which results in a loss.


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