When a borrower struggles to meet the payment obligations of a debt instrument, the borrower and creditor may work together to modify some of the terms to give the borrower a little breathing room or provide the creditor with more security. The parties may agree to change the interest rate, extend the repayment period, change collateral, or make a variety of other modifications to the debt instrument. What the parties may not realize is that the modifications could result in a taxable exchange of the “old” (pre-modification) note for a “new” (modified) note.

Troutman Pepper's Creditor’s Rights Toolkit is a series that provides practical insights to help creditors confront the challenges of commercial bankruptcy.