Richard C.E. Beck (New York Law School) has published The Tax Treatment of Cancelled Interest and Penalties on Consumer Debt, 53 N.Y.L. Sch. L. Rev. 1025 (2009).  Here is the abstract:

When defaulted credit card debt is cancelled, only the forgiven principal is taxable as COD income. Cancelled interest and penalties is not taxable income unless the items would have been deductible, and thus the Tax Court's recent decisions in Payne v. Commissioner, T.C. Memo. 2008-66, and Hahn v. Commissioner, T.C. Memo. 2007-75, are erroneous. Cancelled penalties are not taxable because the borrower has received no loan proceeds, and cancelled interest is not taxable because it is in effect simply a price adjustment for the use of money. Currently required 1099-C reporting is defective because it does not require splitting out cancelled principal. Taxpayers are being unjustly overtaxed because forgiven credit card debt often consists of amounts of interest and penalties which are equal or greater than the amount of principal.

A shorter version of this article is at Payne v. CIR and the Tax Treatment of Defaulted Credit Card Debt, 121 Tax Notes 1315 (2008).