A few years ago, the IRS National Taxpayer Advocate's annual report to Congress noted this complexity issue. One suggestion offered by the NTA was to just exempt a certain dollar amount of cancellation of debt (COD) income. I think that makes sense because one possible way that someone could exclude the income would be if they are insolvent. Section 108 of the tax code allows for an exclusion of COD income to the extent of insolvency when forgiven. That can be a complex determination as you must total up the value of all of your assets and see if it is less than the amount of your debts. If yes, you can exclude up to the excess, BUT you must then reduce the basis of your assets by the amount excluded. If your assets are just your car and household items, this is a lot of recordkeeping and the likely result is that the reduced basis would still not produce a gain upon sale of the assets (because personal assets lose so much value while owned and used).
Take a look at the article - what do you think about these rules? How can they be simplified?