Forum Rules (Everyone Must Read!!!) (updated: 04/28/2015)

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Received 1099-C Cancellation of Debt for House Surrendered in a Chapter 13 Case

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  • Received 1099-C Cancellation of Debt for House Surrendered in a Chapter 13 Case

    In 2015 we decided to sell our home and buy a new home. Our real estate agent was confident that we could make $20-30k off of the sale to help recover the down payment we were making on the new house. We went forward with the purchase. Huge mistake. Long story short, the house wouldn't sell even for a small loss, some buyers were telling us they wouldn't pay $30k under what we owed on it due to things they found wrong with the property. We were stuck with two mortgages for about a year. During this time we also ended up taking a $40k/year drop in income causing us to no longer afford paying on two mortgages, so we sought we filed for Chapter 13 and chose to keep the new home and surrender the old home back to the lender.

    We filed in July of 2016 and we were finally confirmed in January of 2017. The process went normally like many others in these forums and in August of 2017 the house went to the lender in the Sheriff sale. We were maintaining the property the entire time and had family stay there to keep it occupied throughout the process, so it was a relief to finally shed ourselves of the burden of maintaining two properties.

    I was getting ready to file our taxes early since we were expecting a refund. Since we are in a 100% payment plan we were expecting to get to keep the money.

    A wrench just came in the mail in the form of a 1099-C from the mortgage lender for the original house. The lender is claiming that they canceled $41,000 of debt. I have no idea how they arrived at that number, the Fair Market Value of the house was only $17,000 more than we owed at the time we surrendered it.

    Following normal rules outside of bankruptcy this would be seen as income and we would need to pay taxes on it. My understanding is that since the property was surrendered as part of our Chapter 13 plan through the court, and all debts listed in the Chapter 13 plan should fall under the exceptions listed in IRS Form 982, we should be able to file Form 982 with the 1099-C and not have to pay income taxes on the $41,000.

    However, I read that the relief from paying the taxes only applied to primary residences and was part of the Mortgage Forgiveness Debt Relief Act. The cancellation of the debt occurred in August of 2017, and as far as I have been able to find through research, that act was not extended to apply for debt canceled in 2017.

    I'm going to reach out to a CPA and our Bankruptcy Lawyer to see if they can provide any guidance. I was hoping to find someone in this forum that is currently or has in the past faced a similar situation that can let me know how they were told to handle the form.

    Does anyone know if Form 982 still covers us from including the canceled debt from the mortgage company as taxable income?

    Feel free to private message me if you do not want to provide official public advice.

    Thank you!

  • #2
    If you are discharging the obligation in the bk, there is no forgiveness of debt income and you would utilize Form 982. The Mortgage Forgiveness Debt Relief Act has nothing to do with this. Please use a tax professional (CPA) for this return, not a DIY computer program.



    • #3
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