Legal Question in Credit and Debt Law in Pennsylvania

The simplest thing also would be to write on the note "cancelled" and give it back to your friend or else tear up the note.

However, releasing your friend could have income tax obligations for you as it might be construed as a gift. Your friend needs to declare it on her income tax form as you do as the donor. Under the current tax law, the donor pays the taxes. You can gift up to $13,000 free of tax per year; anything over is subject to gift tax. To avoid this, release up to $13,000 at a time (check with your CPA or tax person, but I believe the gift amount is now $13,000). That is one way. Another is simply to not collect and in your will include a statement that any balance owed on the amount lent is forgiven.

I cannot counsel you to not pay taxes and I would urge you to handle this properly so as to avoid any tax liability. I am not a tax atttorney or a CPA and you should talk with one if you do not have one. However, the issue is ultimately between you, your friend and the IRS. If you want to risk any consequences, then just tear up the note or indicate that it is cancelled.

You are a nice friend!