To what extent is debt cancelled in a personal bankruptcy taxable as cancellation-of debt income? All cancelled debt, except for that related to real property, is taxable as cancellation-of-debt income. Unsecured debt that is cancelled in bankruptcy is taxable as income. Only secured debt in excess of the fair market value of the collateral is taxable as income. Debt cancelled in a bankruptcy proceeding under federal law is not taxable as cancellation-of-debt income.