Yes, it is legal. This, from the IRS:
In
general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs. The canceled debt isn't taxable, however, if the law specifically allows you to exclude it from gross income. These specific exclusions will be discussed later.
The exceptions include a gift, certain student loans, canceled debt that would have been deductible, and others that don't sound like your situation.
Here is the whole text of Tax Topic #431:
Tax Topic 431, Cancellation of Debt,
1099-C
To enter it into Turbo Tax:
1. Click Federal
on the left-hand side menu.
2. Click Income
across the top.
3. Scroll down to Less Common Income and click Show
more.
4. Click Start
or Revisit by Miscellaneous Income, 1099-A, 1099-C.
