Say for example you buy a car on credit from a dealership. On paper, the bank paid for your car so that makes you a debtor and the bank a creditor. You will then be subject to settle the debt by paying back the bank since they supplied the funds that allowed you to purchase the car. Failure to do so would allow the bank to repossess your car and sell it in order to wipe away the debt. This would ultimately make you lose your car and take a significant hit to your credit. In this case, the IRS cannot collect for the bank, since the bank took back the car to settle the debt. In the case where certain circumstances made it impossible for you to pay back the debt the bank may write off the debt as forgiven, which allows the IRS the opportunity to collect tax. The tax would be administered to forgiven debt since it would be seen as taxable income.