The Loan Balance is Gone…. Really?
I have received many calls in the past month from borrowers who have received letters from their mortgage lenders stating that the lender is going to forgive the balance on their line of credit in the next 30 days if the borrower does not call to decline the offer. Yes, you read that right. No strings attached. The balance on the loan will be gone.
So who is doing this? So far, most of the letters have been coming from Bank of America and Chase. However, given the requirements of the National Mortgage Settlement, I think we can expect to see the letters from all the Big Five i.e. Ally Financial, Inc. formerly GMAC Mortgage, Residential Capital, Bank of America, f/k/a Countrywide Home Loans Servicing, Citigroup, Citibank, CitiMortgage, JPMorgan Chase and Wells Fargo Bank.
So, what is the catch? The catch is that when the debt is forgiven, a 1099c is going to be sent to the borrower for the amount forgiven. What this means is that amount forgiven is going to be considered income at your current tax rate unless one of the exceptions to the income recognition rule applies.
So what are the exceptions?
#1- The borrower filed bankruptcy before the debt is forgiven. The bankruptcy does not have to be finished, but it does have to be filed prior to the end of the 30 days.
#2- The borrower is insolvent. What this means is that the borrowers does not have assets such as 401k/IRA/pension benefits or other assets. Many a person has believed themselves to be insolvent only to be informed that those assets they cannot currently reach are still assets for determining solvency. If you think you are insolvent, be sure to talk to your tax advisor within the 30 day period to confirm.
#3 The Debt being forgiven falls under business debt exception
#4 The Debt being forgiven falls under the farm debt exception.
#5 The Debt being forgiven was one of the original loans used to purchase the home.
#6 You fall under the short sale and mortgage forgiveness act which is still in effect until January 1, 2013 which provides that to the extent the money was used to purchase the property or make significant improvements to the property and it has been your home for the last 2 of 5 years, you do not owe taxes
In conclusion, if you receive one of these letters, I recommend you seek legal counsel immediately to determine whether this offer is in your best interest. This is a complicated area of the law. A real estate or bankruptcy attorney should be able to make to an analysis of your situation quickly which will allow you to decide if the debt forgiveness is in your best interest.
I see people for a FREE 30 minute consultation at my offices in Walnut Creek and Brentwood.