1120S Shareholder Bankruptcy

[Diane]

An 1120S shareholder purchased $30,000 of inventory on her personal credit card for the retail store filing as an 1120S. The entry on the books was Debit Inventory/Credit Loan to Shareholder. Shareholder has since filed for bankruptcy and had the credit card debt canceled. No cash was involved in these transactions. I've been told by the bankruptcy lawyer that since there was no cash, the loan can't be repaid. How will this be handled on the books of the 1120S? Where can I put the $30,000 since it no longer (apparently) qualifies as a loan. Paid in Capital? I don't know since there is no cash involved; does the shareholder still have equity in the 1120S?

[OldJack]

Just because the shareholder was personally relieved of paying the credit card company does not relieve the corporation from paying its debt to the shareholder. From the standpoint of the corporation the loan should be paid to the shareholder so the corporate books should still reflect the debt. The attorney should have stuck to chasing ambulances.

[Diane]

Thank you. How would the Shareholder treat the payback from the Corporation? Since she was relieved of the debt, would this money be taxable to her? Or, just treat it as loan payback.