Expert: Regan Shinski - 12/28/2010

Question
TWO questions, specifically relating to tax consequesces.
First- We have lived in our primary residence in FL since 2001. We have a first ($202,000 with BOA) and second mortgage ($153,000 with Chase) due to a decline in income (my husband is self employed) we stopped paying both the first and second back in May 2010. House currently worth around $300,000.  CHASE settled with us on the second mortgage for $25,000 (which we borrowed from a relative) Since the balance was $153,000 they wrote off/ forgive the difference. WILL I HAVE TO PAY TAXES ON THE WRITE OFF AMOUNT??

SECOND question: We recently allowed a reposession of our boat to take place. The loan is with BB &T we owed about $125,000 on the boat. (it may be worth $60,000 to $80,000). They will be selling the boat at auction for way less than what we owed. WILL I BE RESPONSIBLE for taxes on the difference????    I have already retained an attorney and we will be filing chapter 13 bankruptcy in the next several months.

Answer
Hi Tricia:

I can't answer if you will have to actually pay taxes on these amounts because that is a complex question.  What I CAN tell you is that it is likely you will receive a 1099-C for both debts.  Actually, on the Chase debt, I would refer you back to the settlement documents because that may contain a specific clause about how the forgiven debt will be handled.  In most cases, you will receive a 1099-C.

Now receiving a 1099-C and having to PAY taxes on it are two separate things.  There are provisions in the tax law that allow you to exempt this "income" from being included in the taxable income.  These provision include insolvency, which it sounds like you may qualify for.  However, like all things with the IRS, there are complex exemptions and limitations so this is why no one can answer with 100% certainty without seeing your entire tax and income situation.

You really should consult a tax attorney or professional who can review your return and make that determination.  Many people do qualify for the insolvency exemption so all is not lost.  If you qualify, I would recommend contacting the creditors and finding out WHEN and IF the 1099 will be issued.  Many times these are delayed a year.  Worse, many creditors wait until the debt is formally written off and outside the statute of limitations.  This can mean you literally will receive the 1099-C in seven years or more.  I don't think this would apply with the home debt since it was formally settled but could be the case on the boat.

Sadly, there is no straight answer for me to give you but I hope this information does help.  You should also consider professional credit repair to immediately start deleting and rebuilding your credit.  Go to www.ficofighter.com for more information.

Good luck,
Regan

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