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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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  • What is troubled debt restructuring and extinguishment?

    Troubled debt restructuring and extinguishment will occur when a creditor grants a concession to the debtor that would not otherwise be considered. The visual below is a recap on the terms debtor and creditor, and why the debtor and creditor would have to restructure the debt arrangement: These incidents will occur for economic or legal reasons related to the debtor’s financial difficulties. The visual below maps out the timeline for a troubled debt restructuring transaction: Troubled debt restructuring will involve one of two types of transactions: 1) Settlement of debt at an amount that is less than its carrying amount. 2) Continuation of debt with amendment terms.

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    A debtor’s debt is considered extinguished if the debtor (borrower) is no longer required to pay back the obligation and they are legally released by law.