Bankruptcy may cancel your debts and obligations, but secured lenders keep their debts alive in their mortgages and foreclosures may continue.
Q: Due to my cancer diagnosis, and subsequent expenses, my wife and I filed bankruptcy in 2010. Just a few days ago we received a 1099-C from the second mortgageA Mortgage is a document granting a lien on a home in exchange for financing granted by a lender. The mortgage is the means by which the lender secures the loan and has the ability to foreclose on the home.A Second Mortgage is a mortgage that is obtained after the primary mortgage, and whose rights for repayment are secondary to the first mortgageA First Mortgage is a mortgage that takes priority over all other voluntary liens.. holder indicating they had cancelled the debt on July 28, 2011.
I called my lenderA Lender is a person, company, corporation, or entity that lends money for the purchase of real estate. and was told that while they have cancelled the debt they plan to retain the note and trust deed as a lienA Lien is an encumbrance against the property, which may be voluntary or involuntary. There are many different kinds of liens, including a tax lien (for unpaid federal, state, or real estate taxes), a judgment lien (for monetary judgments by a court of law), a mortgage lien (when you take out a mortgage), and a mechanic's lien (for work done by a contractor on the property that has not been paid for). For a lien to be attached to the property's title, it must usually be filed or recorded with a local county government office.. I am more than confused! Since the note and trust deed are associated with a debt, and since the debt has been cancelled (with its attendant IRS consequences) what possible justification can the bank have to refuse to surrender the note and sign the mortgage reconveyance?
A: You are confused. Your bankruptcy may have released you from your personal obligation to repay the debt, but that doesn’t mean that the lender gives up its claim on the property. The debt is evidenced by a note that requires you to pay the lender back money you borrowed. The lender takes your property as collateral in case you fail to pay.
In your case, you didn’t pay and your personal obligation to repay the debt was wiped out in the bankruptcy. However the lender has a lien on your home that they have a right to enforce to seek repayment.
Given this situation you can see that the lender may not seek repayment from you but can seek to sell the property to get what it is owed. The lender is under no obligation to extinguish the debt and the lien on the property. They were only obligated under your bankruptcy case not to seek money from you.
As far as the IRS goes, you probably have no phantom income to report. Phantom income is created when a lender forgives a debt. That forgiveness is considered income to you and that is why it was reported to the IRS. For some people that could be a problem. However, under certain rule changes, you won’t have to pay income taxes on that forgiveness if the loanA Loan is an amount of money that is lent to a borrower, who agrees to repay it plus interestInterest is money charged for the use of borrowed funds. Usually expressed as an interest rate, it is the percentage of the total loan charged annually for the use of the funds.. was on your primary residence.
And as far as other borrowers are concerned, debt forgiveness on primary residences for situations like yours won’t be considered taxable for borrowers through the end of this year. However, if your debt is forgiven next year and the tax rules go back to the way they were, you’d have to pay income taxes on the amount of debt forgiven.
If you own an investment property, second home, vacation home or time share and a lender forgives the debt and sends you a 1099, you will have to pay income taxes on the amount of debt that was forgiven.