Mia Jones released from her obligation to pay her credit card debt in the amount of $5,000. The fair market value (FMV) of her total assets immediately before the discharge was $7,000 and her liabilities were $10,000. Mia was insolvent to the extent of what amount?

A. $0 B. $3,000 C. $7,000 D. $10,000

Insolvency

A debtor is insolvent when, and to the extent, the debtor's liabilities exceed the fair market value (FMV) of the assets. Determine the debtor's liabilities and the FMV of the assets immediately before the cancellation of the debtor's debt to determine whether or not the debtor is insolvent and the amount by which the debtor is insolvent. Exclude from the debtor's gross income debt canceled when the debtor is insolvent, but only up to the amount by which the debtor is insolvent. However, the taxpayer must use the amount excluded to reduce certain tax attributes.