Forclosure problem

iVillage Member
Registered: 10-17-2003
Forclosure problem
14
Sun, 02-12-2006 - 4:54pm
Hi. This question is about a forclosure which took place in 2004. The sheriff's sale was in Nov. of 2004.
The other day I received a 1099 for 25,000. as income to me from the former mortgage co. This was the amount of an equity loan taken out on the forclosed home in order to purchase it initially with 100% financing.
What should I do? This is not money that I ever saw, and yet they claimed it as income they paid to me in 2005. I did not recieve any info about this equity loan in the year 2005, so how can they say I owe this?
Any help is appreciated.

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Community Leader
Registered: 03-17-2003
In reply to: dlb323
Sun, 02-12-2006 - 9:04pm

It is reported as income because the lender did not get paid $24,000 from the foreclosure sale. It is the only way they can clear that unpaid balance from their books. The only way they can, according to banking laws, clear this bad debt from their books is to shift the debt back to you as income. Thus it is legally income to you, you receive a 1099 informing you of the amount and you must report it as income on your income tax return.

Same thing happens with repo'd cars, repo'd boats, repo'd airplanes, etc. Virtually every secured debt that reverts back to the lender is sold off, commonly for pennies on the dollar. And you get stuck holding the bag with a 1099 for the amount of your debt that was not paid off.

Lenders don't tell you about this. They could care less how much they sell your property for. It's not like they are going to recover 100% of your debt with selling off the property. They know whatever isn't paid will just be shifted back to you as income.

Sorry to be the bearer of bad tidings dlb323.

This can not happen in bankruptcy.

Carolyn

iVillage Member
Registered: 10-17-2003
In reply to: dlb323
Mon, 02-13-2006 - 11:06am
well, is there anyway that the statute of limitations was stretched on this one? I mean, the sale was in 2004. The 1099 says 2005. How can they send one for the year AFTER the actual sale? They can't clear their books a year later, can they? It doesn't make sense to me.
Community Leader
Registered: 03-17-2003
In reply to: dlb323
Mon, 02-13-2006 - 1:38pm

The statute of limitations isn't a factor. You can speak with a lawyer, a tax specialist, and the IRS if you like or if that would help, but the fact is under law your debt resulted in a deficiency to your lender and after the foreclosure sale your debt was paid except for the amount on the 1099. SOL isn't a factor simply because they are shifting the debt back to you -- no reason to sue you since all they need to do is issue a 1099.

The only time you can escape a deficiency 1099 is if you had allowed the foreclosure to occur during bankruptcy.

I know this is unbelievable and feels outrageous. After all you let the property revert to the lender. But until your financial obligation is resolved with a sale and 1099, if applicable, you really were not free from the debt. Usually these matters surprise unsuspecting citizens when they get the 1099 in the mail.

I wish I had better news for you.

Sorry.

Carolyn

iVillage Member
Registered: 10-17-2003
In reply to: dlb323
Mon, 02-13-2006 - 2:17pm
Thanks for your response.
I'm wondering if my ex got a 1099, as he claimed bankruptcy in 2004. Probably not, huh? I doesn't seem right that all this should fall in my lap. I'm the one who has sole custody of the children, and he was the abusive one. Boy, this ticks me off!
Anyway, (sorry for the rant) I read that perhaps a Tax Atty could somehow prove that I'm insolvent to erase this somehow?? What do you think, have you ever heard this?
I am afraid that I am going to loose my Pell grant, I am a f/t student, and this will really screw up my income level, and what's irritating, is that it is a non-issue, I never got that money, and I'm sure the house was sold at a profit, they probably kept anything over and above the net due on the 1st mortgage. Would getting a copy of the sale of the house papers help me any?
Thanks again for any help you can offer.
dlb323
Community Leader
Registered: 03-17-2003
In reply to: dlb323
Mon, 02-13-2006 - 5:38pm

If I were in your shoes, learning what you have learned, I would be ranting too. Rant all you want. This is a great place to rant. In fact, you may be surprised to learn there are scores of others who have also spent time ranting over similar, if not the same, issues!

Your ex did not get a 1099. It is because he filed bankruptcy that he is insulated from ever being tied to any debt prior to the date of filing. If he had not filed he would probably have a 1099 for his half. Since that can not happen, you are 100% responsible for the deficiency.

When creditors sell off secured property you would be surprised, well maybe NOT surprised, to learn that your property went for pennies on the dollar. They will try to get as much as they can but rarely do -- especially in cases where there was 100% financing. That means your debt, the 100% loan secured by a second Deed of Trust on the property, was financed by your equity. You know that because there was not enough equity to pay off that 2nd DOT on the house. It's another way creditors like to stack the cards against you. They know there is little risk if you default. Thanks to their paid lobbyists, the credit industry is responsible for getting the laws changed so they don't have to carry bad debts on their books. Now if you foreclose or default, they sell off the property for whatever they can get and shift the deficiency debt to you as income and they are clean as a whistle.

I posted below about Ethics and Morals in creditors. IMHO there are none. Zero, zip, zilch, nada morals and/or ethics in creditors. You may have some feelings along those lines too at this point in time.

A tax attorney could file for you as being insolvent: but it might take more than the amount you owe in tax on the 1099. Bankruptcy might not help unless there are other things going on in your personal finances and a qualified bk attorney can advise you. Bankruptcy would not hinder or hamper your financial aid package for college. The tax attorney can't file that you qualify under the Injured Spouse program because your ex filing bankruptcy doesn't qualify. Filing bankruptcy is a right guaranteed under the Constitution of the United States of America. It's a Right like freedom of speech.

You could check at the County Assessor's office to see the selling price of the house, but these sales are usually less than what you owed. Looking at what happened to you would certainly be a good learning experience. One thing for sure, next time you buy property you will approach things differently.

Times like this dlb323, in reading what has happened to you, I think schools should teach students these things - a "Creditors 101" instead of just throwing people to the wolves and heavily advertising with their predatory marketing strategies. My heart goes out to you. It really does. My kid is in school and I KNOW the impact of income on your financial aid.

Carolyn

Community Leader
Registered: 03-17-2003
In reply to: dlb323
Tue, 02-14-2006 - 2:25pm

dlb323 I have been poking around and asking questions and there might be an "out" for you. I'm not a lawyer or tax accountant, but you might want to sit down with one and pour over your entire financial picture - that means debts and income from the time when the property was sold.

We have discussed why you received the 1099-MISC income form and having to report the amount written off as income. But you might be able to avoid this, however, if you can show that at the time of the write off your debts exceeded the value of your assets.

The only one who should be stepping you through this process should be a qualified tax person. Even a tax attorney, who might charge you $300-$600, would be money well spent when you contrast that with paying 10% of the $25,000 ($2,500 in tax) and what it will cost you in financial aid.

When I have had delicate tax matters, I have always paid my tax attorney (who is also a CPA) to prepare my tax returns. The amount he charges is also deducted so it doesn’t hurt quite so bad.

Dlb323 I know you don’t have a lot of money to spend on tax preparation or to pay income tax, but if it works out for you it would be great. See what you can find out ok. Don’t give up yet. Pull together your finances for that period of time and maybe a qualified tax person can work the numbers for you.

Keeping my fingers crossed for you.

Carolyn

iVillage Member
Registered: 03-07-2005
In reply to: dlb323
Tue, 02-14-2006 - 3:57pm
Someone correct me if I'm wrong but on your 1040 there's a line seperate from your actual income as in wages, tips, etc. I think you may be able to list this under/as additional income(I'm sure that this situation is really not that uncommon) and explain it. It may not affect the pell grant if that's the case. I guess income is income BUT it's not like you actually got to LIVE off that $25,000 this year. Again, I may be wrong--there has to be some loophole for things like this. You may want to call a tax attorney or look into the tax laws yourself. HTH


Edited 2/14/2006 4:02 pm ET by sweetjumps
iVillage Member
Registered: 10-17-2003
In reply to: dlb323
Wed, 02-15-2006 - 12:29am
Thank you Carolyn, for your help and advise. I think I know what out you are talking about, it is proving that I was insolvent? Or am insolvent now? Well, in answer to that question the answer is yes. I have atty's bills, credit cards under my name still owing, loan off life insurance, etc, etc. I also have 2 kids (one w/special needs) to support,and no car. The Ex is letting my "borrow" the good vehicle that was awarded him thru the dv, (because he commutes), well, he lied about alot in ct. and essentially bought a car using his parents name (new car) and the children and I were awarded the 11yr old car w/189,000 miles on it. It is currently not running. ANYWAY, I do not have the $ to pay a tax atty, but I may go in and get a free consult. I have worked in income tax field b4, and I think I can do the return myself with a little advice. A friend also runs a tax business out of their home, so I have help from there as well.
I am enrolled in 15 cr hrs this semester and only work VERY p/t... so, whatever I do, I have to do it myself, and I know I can. I've been through much worse.
Thanks again for your support :-).
d
iVillage Member
Registered: 03-24-2004
In reply to: dlb323
Wed, 02-15-2006 - 11:13am

Carolyn has given you excellent advice. Other than knowing that they will come calling with a 1099 for anything left over after a forclosure, I don't know alot about tax issues. That's why I always have a CPA/tax attorney do my taxes when they are "delicate" in nature too.

What I wanted you and everyone here to know is that your divorce lawyer really did you a dis-service. When you found out your ex was filing bankruptcy SOMEONE...the divorce lawyer, friends, ANYONE who cared about you should have told you that you needed to FILE ALSO.

Any time one spouse files and the other does not...the non filing spouse get SCREWED. They get stuck with 100% of any debt left. My brother suffered this when his wife filed BK to get out of a debt issue over a bad sale of her child care center. Unfortunately my brother was listed as an officer and they really killed him at tax time. He wouldn't have filed due to old myths about BK...but he learned his lesson.

Hope this all works out. I'm not sure that tax attorney's give free consultations but keep trying.

sweetpea

sweetpea
Community Leader
Registered: 03-17-2003
In reply to: dlb323
Wed, 02-15-2006 - 12:15pm

I had an idea you are living on a tighter-than-tight budget. What sweetpea1233 wrote about filing bk after learning your ex filed was sage advice. There is absolutely no way you could EVER carry the financial baggage your ex left you. Divorce is precisely the #2 reason people file bankruptcy, second only to medical expenses.

My tax attorney also handles personal and business bankruptcies. Perhaps you can seek a free consultation with a specialist who handles taxes and bankruptcies. If you go in for a free bk consultation the lawyer could also advise on the tax issue with this 1099-MISC. You are just reversing the reason in order to get a free consult. Shhhhh. ;-)

In other words you are scheduling to discuss a bankruptcy because your ex filed and left you with old debts. From there you can segue into the 1099-MISC. For both you need your entire financial picture: assets and debts, especially for a tax lawyer to take a look at your situation and see if he/she can work the numbers in your favor to avoid tax on the 1099-MISC.

It's going to cost you money one way or another. Either you pay a tax specialist or you pay 10% or 15% on the 1099-MISC and mess up your financial aid package.

Keep in mind you are doing the best you can. You have TWO CHILDREN to protect. You have to protect what little you do have. You need to protect your health. The problem isn't going to go away. You can tackle it by tapping into all the legal expertise out there. YOU CAN DO THIS!

Please let us know how things go and how you are doing. You have a lot on your plate and are probably nothing short of a miracle worker given the hand you have been dealt. We are here for you OK. You aren't alone and you will be fine.

Chin up.

Carolyn

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