Liability on Cancellation of Debt?

DolfanFICO · ‎07-16-2016

Hello, all!

Not sure this is the right forum for this question, but I trust you guys will keep me honest....

I filed for BK in April/2014, got it discharged in July/2014. Main items were First and Second mortgages... along with a few credit cards... my house got foreclosed in December/2014 (I think official sale was in March/2015 or so, but our court thing said that the house would be the bank's as of December/2014... 23rd, I think)... so far so good... but some time in 2015, I got a letter from Bank of America (Secondary Mortgage holders, for about $210000) saying it had been 'forgiven' or whatever the term is ('Cancellation of Debt' I think)... BUT by that time the BK had been discharged and the debt gone, right? Furthermore, the house was not even mine anymore, so they would have gotten paid by the foreclosure driven by the First Mortgage holder, correct? Anyway, I did not give it a lot of though until I got a tax form 1099-C from them, which then I sent to the guy that does my taxes and he said that while I would not owe Federal taxes for that, I would owe State taxes (live in NC) and needed to amend my 2014 return... well, he just finished preparing that and it seems I am in the hole for over $12000...

So, I am trying not to panic, and felt very lost and confused until I thought I should reach out to you guys... what do you think? Isn't the foreclosure supposed to take care of the debts, even if incomplete? And the fact that we got the bankruptcy discharged, including the house debt, doesn't that get us protected? I understand they are and were not COLLECTING debt, which is what the protection is, right? But is it legal to turn the whole situation around and make us look like we got that 'forgiven' debt as income? Which again, when the house got foreclosed, all is done, correct? From what I understand, the house/debt was not even mine anymore by the time it was 'cancelled'... The most frustrating thing is that I kept trying to get to someone at BAC before the foreclosure to negotiate something that would be better for all, but they never even considered it....

Can someone versed in thiese situations (tax law and foreclosures?) give me some light?

What is the legal situation here?

What would you do? Or whom (CPA, Tax Lawyer, BK lawyer) should I contact?

My tax guy has been helping me for years, and I understand his approach is all based on tax rules... so, he sees a form this and that and knows what to do with it... but he may be missing a point or two regarding bankruptcy law... I hope... and definitely, foreclosure process... because that is supposed to take care of the liabilities, I thought!

Can you help me with some clarity or direction?

Thanks in advance for the usual help and support!!!

gdale6 · ‎07-17-2016

Any debt canceled by the bankruptcy court is not incuded in income so if the mortgage(s) were included in your BK7 filing and discharged thats it there is no tax due.

RobertEG · ‎07-17-2016

Is the "guy who does my taxes" a CPA?

pipeguy · ‎07-18-2016

Congress has extended a specific exmption for forclosure and default specifically having to do with personal home loans/morgages included in the "tax extenders package" at the end of 2015 providing relief through through 2016.

Most states follow federal tax code for deductions, income, et al - I can't say specifically for North Carolina, but it should be pretty to figure out.

Copied below is from the Turbo Tax site, which is easier to understand than posting all the Federal code (should be posted on IRS.GOV too)

The Mortgage Debt Relief Act of 2007

Applying only to your principal residence, the Mortgage Debt Relief Act excluded as income any debt discharge up to $2 million. Provisions of the Act applied to most homeowners, and it included partial debt relief gained through mortgage restructuring as well as full foreclosure. Refinancing was also allowed, but only up to the amount of principal balance of the original mortgage.

The Act also covered loans and subsequent debt forgiveness for amounts borrowed to substantially improve a principal residence. You cannot use provisions of the Act for other canceled debts, and the relieved debt must be secured by the principal residence property. The Act covered debt forgiven within the calendar years of 2007 to 2016. This can also apply to debt that is discharged in 2017 provided that there was a written agreement entered into in 2016.
Extension of the Mortgage Debt Relief Act

The Act initially covered a three-year period between 2007 and 2010, but was extended four times, to 2012, 2013, 2014 and then to 2016. This can also apply to debt that is discharged in 2017 provided that there was a written agreement entered into in 2016.

DolfanFICO · ‎07-18-2016

Thanks, gdale6!!!

For what you know, is that applicable to all levels? Federal and State (all states)? That seems to be the question...

Now, in adidtion to the BK, when a house is foreclosed, isn't the deal that at that time the bank(s) take possession of the house and whateverthey get is what the get? That, plus the BK, should be protectiob enough, hence my confusion!

Thanks!

DolfanFICO · ‎07-18-2016

Yes, Robert... he is, and he has been really good over the years... I'm sure that accounting wise he is right... he explained to me that NC does not do the Federal thing on this case... but my point is that in addition to the BK the house was foreclosed... so, I lost it, I got the BK... by 'forgiving' the debt, I ended up worse off than otherwise...

Still confused...

DolfanFICO · ‎07-18-2016

Thanks, pipeguy!!! Very thorough response, which I appreciate!!!

That sounds like what he says... that NC is not doing the same as Federal for this particular thing as a result of their (State's) income crunch, so they did away with it to try to get more money... but my thing, in addition to the BK, is the foreclosure... at the time BAC 'cancelled' my debt, the house was not mine anymore. It had been foreclosed, sold for more than the first mortgage was worth, and my understanding is that for the first mortgage holder to be able to sell/foreclose the house, they need the second mortgage holder (BAC) to release their part of the lien, right? So, it seems to me that BAC has it both ways: they part take on the proceeds of the foreclosure (whatever it was, which in this case was not bad), then use Federal funds to 'forgive' my debt, and then send me the 1099C so that counts as income and I have to pay taxes?

That's where I am confused!!

Hope someone can shed some light, and I really appreciate the answer so far...

pipeguy · ‎07-18-2016

Based on NC code, somehow NC doesn't follow federal law on excluded "mortgage based: (1099-C) income http://www.dor.state.nc.us/taxes/individual/impnotice060316_referenceupdate.pdf

So, there goes that "out" - looks like you'll need to follow the bankruptcy avenue for exclusion. As far as BAC and other big banks, they always need to be double checked, but it's NOT because they are benefiting from the write off, that's a single business loss to them and is accounted as a loss, there is no additional benefit for the lender to issue a 1099-C it's just book keeping, not a double deduction or anything like that.

I suspect that someone is "missing" the IIB line item here which is where I'd look first. You can also look to the exemptions for 1099-C income such as insolvency which NC probably follows because its not specific to a forclosure.

Anonymous · ‎07-18-2016

@DolfanFICO wrote:
Thanks, gdale6!!!

For what you know, is that applicable to all levels? Federal and State (all states)? That seems to be the question...

Now, in adidtion to the BK, when a house is foreclosed, isn't the deal that at that time the bank(s) take possession of the house and whateverthey get is what the get? That, plus the BK, should be protectiob enough, hence my confusion!

Thanks!

AFAIK, a foreclosure only fully discharges the primary mortgage (in non-recourse states), not a second or a HELOC. But the BK does discharge ALL debt...

pipeguy · ‎07-18-2016

@Anonymous wrote:
@DolfanFICO wrote:
Thanks, gdale6!!!

For what you know, is that applicable to all levels? Federal and State (all states)? That seems to be the question...

Now, in adidtion to the BK, when a house is foreclosed, isn't the deal that at that time the bank(s) take possession of the house and whateverthey get is what the get? That, plus the BK, should be protectiob enough, hence my confusion!

Thanks!

AFAIK, a foreclosure only fully discharges the primary mortgage (in non-recourse states), not a second or a HELOC. But the BK does discharge ALL debt...

Not Student Loans or IRS obligations as far as I know ... that said a 1099-C generated after discharge is NOT treated as an IRS Obligation (prior)