"Since this was not actual income"

Just curious.  If it isn't income, what is it?  

But you could have an out.  Was the client underwater with debt so that some or all of the debt could be excluded from unactual income?

Have you gone through the canceled debt worksheet to see if maybe Insolvency would help? 

Theres an Insolvency worksheet in there that I have clients complete to see if maybe we can make some or all of it non-taxable.