Ask The Get Out of Debt Experts Real Estate Tax Related

Our Second Mortgage Charged Off. What Now? – Lynette

“Dear Steve,

Our house was foreclosed in march 2009 in california. we had a 1st and 2nd loan. we received a 1099-A for the 1st loan, but nothing for our 2nd. when we went to get our taxes done, our tax preparer was asking for a 1099 for our 2nd so we can put it under mortgage debt forgiveness.

We called our lender for the 2nd loan and couldn’t get an answer. it wasn’t until my husband checked his credit report that we found out that the lender sold the loan. we then called the lender again and was given the number to the collection agency that is now handling our loan.

we told the collection agency that we were wondering if we’d be getting a 1099-A or C since our house was foreclosed. we were told that we would if the loan was purchase money and not a refi. it was not a refi, but the collection agency didn’t have this info so they sent our file back to the lender to get clarification.

we called the lender again to find out what’s going on and to tell them that the collection agency sent back our file to them. we were told our loan has been charged off and that the collection agency will have to decide what they want to do. BUT the collection agency “closed” the account and sent it back to the lender.

now what? is it likely that we’ll get a 1099-A or C for our 2nd loan or will it still be a charge off and we’ll have to pay it off? our tax return is on hold since we’re not sure if we’ll be getting a 1099 still. also, should my husband just file for bankruptcy to make all of this go away? (my name wasn’t on the title.) if he does this, what assets will it affect? will it also affect things that are under my name?

READ  I'm Freaking Out About Owing the IRS after Settling My Debt. - Jerry

THANKS! we are so confused!

Lynette”

Dear Lynette,

I’m not sure what is holding up the tax preparer. The tax person knows you have this forgiven debt and it has to be reported. It can be reported without a 1099-C in hand. The second mortgage lender may have already reported it to the IRS and just not sent you a 1099.

So the 1099 is going to result in a big tax liability for the forgiven debt. If you thought owing the mortgage company was bad, try owing the IRS.

Your husband needs to click here to find a local bankruptcy attorney and go talk to them and find out what his options are. He may not be aware that even if a 1099 was issued and a debt was charged off that the lender can still come after him for a deficiency judgment for the debt. Neither a 1099 nor a charge off eliminate the obligation for the loan.

Sincerly,
Steve

You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.




About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

2 Comments

  • The Debt Forgiveness Act allows you to be exempt from tax liability from a foreclosure. Check out the IRS Rules to see if you qualify. 

    • The Mortgage Debt Forgiveness Act only applies to purchase-money loans for primary owner-occupied residences. It does not apply to loans that were refinanced later, or HELOCs, unless the funds were used exclusively for property upgrades or repairs. However, the usual IRS rules for insolvency still apply, so that exemption may still be applicable depending on the actuals.

Leave a Comment

Scroll to Top