Jeff, I am sorry to hear that you went out of business. I am trying to answer here based on the information you have provided however, I would advice that you get in depth analysis of you situation. Your accountant is right. You would have to pay taxes on the amount of cancellation of debt. Let me give you an example.If your business borrowed $500,000 and you co-signed or was the guarantor. You used the $500,000 to purchase some assets say machinery with a life of 5 years. Your book value was $500,000 at the time of purchase. You depreciated the property using straight line method of depreciation. Two years down the line you had to file bankruptcy. At this point you had the balance of loan down to $400,000 (paid off $100,000 of loans out of $500,000). Lets say you sold the machinery which has a book value of $300,000 ($500,000 purchase price less $200,000 depreciation for 2 years) for $350,000. Here you will have a gain of $50,000 which you will have to recognize as Capital gain. Your business (S Corp) files bankruptcy, since you are guarantor you are personally liable to pay the loan off in case the corporation is unable to pay. There is no cancellation of debt here. But, if you are also completely relieved of the liability or upto the amount of debt that you wont have to pay back then you would have to disclose the relief of debt as Income from Cancellation of debt and you would pay taxes on the money depending upon your tax bracket. For example: out of the $400,000 debt $200,000 was relieved then you have to recognize the $200,000 of cancellation of debt as income and pay taxes on it. Whether or not you have any money to pay taxes or you are in a position to pay taxes is a different chapter. If after bankruptcy you are left with nothing then there are other alternatives you can use to minimize the amounts that you can settle your tax bill with IRS.

I hope I answered your question. If you have anyspecific question then please eloborate your question in detail (you dont have to submit personal information, you can make up an example to resemble yours) and I will be glad to respond.Good Luck.