Cheryl provided a personal loan $27,500 to her friend Ned $27,500 three years ago. Ned signed a note and made small payments on the personal loan. Last year, when the remaining balance was $20,750, Ned notified Cheryl that he could not pay the balance on the loan. Last year (2020), Cheryl had capital gains of $8,100 and taxable income of $31,500. Early in the current year (2021), Ned contacted to let her know he could make payments again and during the year paid Cheryl $18,225 towards the loan principle.

On her 2021 tax year return, how does Cheryl treat the $18,225 received in the current year? Explain how you reached the answer and what tax rules cover your decisions.