Can You Recover from Bankruptcy and Foreclosure


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Former homeowners who have been foreclosed on have to go through an entire year of loss after loss. First, they lose their home and have to relocate. Next, they have to figure out how to re-establish credit because they have lost their once good credit rating. Then, as homeowners attempt to put this behind them, they go to the mailbox and receive a 1099. A 1099A or 1099C is issued by the creditor for the abandonment or cancellation of debt.

WOW! The homeowner assumed that this nightmare was over but now they encounter this tax issue on top of everything else. As if it is not bad enough to have a foreclosure on your credit – you now may have the IRS coming after you for this “income” due to the debt forgiveness.

Was it really a “income”? What is “debt forgiveness”? What does this “1099” mean? Some lenders are required to give you a 1099 after a foreclosure auction or even a short sale. This means that the lender was unable to collect the full amount of the debt and therefore you are picking up the tab for the difference. You are now going to get this 1099a/c which is reported to the IRS. This 1099 states that you were forgiven a certain dollar amount and now you are reporting it as income. The forgiveness part comes into effect where the lender says, “I was so gracious that I forgave you of what you owe me. But here’s the bill for my forgiveness.” As we all know, the IRS is a force to be reckoned with. The IRS is going to get what is theirs, whether we like it or not.

Bankruptcy may be an alternative for a homeowner who has lost their home or an investment property. The bankruptcy laws are designed to help the consumer with these types of issues. However, even if you file bankruptcy you may not be able to get rid of some of the 1099 liability. Of course that depends on how quickly you act after your foreclosure action, and how long you waited to file for your bankruptcy. Bankruptcy may be able to get rid of multiple 1099 liabilities.

However, bankruptcy is not for everyone and there may be other alternatives available to the consumer to address these issues. The lender focuses solely on their loss and their gain and may be inappropriately reporting a dollar amount on your behalf. You should be aware of what your options are in order to assert your legal rights against the creditor. In bankruptcy, if the debt has been discharged the creditor is not supposed to issue you a 1099. But, of course, that doesn’t stop them from doing it. I encounter this issue frequently with my clients and it is something that must be addressed.

It is important for you, as a homeowner, who has received a 1099 from a foreclosure action, or even a short sale, to see their tax professional. There may be laws that protect the homeowner from enforcement of this “income.” However, that doesn’t mean that the situation is resolved. Sometimes you are able to get rid of the tax liability but the lender has up to 5 years to come after a homeowner for the deficiency. What that means is that the lender has up to 5 years to decide if they are going to sue you for the amount they failed to collect through the auction or short sale. This is still an issue that has become more of a concern in the recent months and is very much a possibility. As an attorney, it is my personal belief that consumers know their legal rights and how to address them. In the end, the goal is to protect yourself from your creditors.

ABOUT THE AUTHOR: Rachel Alvarez Esq.
The Alvarez law firm a Professional Association is a private firm owned by Rachel M. Alvarez. Her practice focuses on financial matters. Rachel’s vision is to aggressively represent her clients in any financial stage for individuals of any walk of life. She is committed to building ongoing relationships with her clients to facilitate their success.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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