Bank doesn't want to issue 1099-C but client can't wait!

[TaxTime829]

Client owned home with ex-spouse... home was foreclosed by bank... Bank issued 1099-A in 2011 showing borrower personally liable... No 1099-C issued to date... Called bank: They said they have 5 years to issue 1099-C and they don't know when they will issue it.

Client is currently an insolvent student ie. Student loan debt exceeds all assets...

Questions:
1. Divorce decree states spouse is responsible for paying mortgage but the bank sees both names on the mortgage...
Can the divorce decree override the mortgage?
2. What is clients responsibility to the IRS if no 1099-C is issued... ie no date of discharge defined by bank?
3. The client may no longer be insolvent after 5 years...
Can the client claim 1/2 of the mortgage debt as income and claim insolvency now without 1099-C from the bank?

[mactoolsix]

Questions:
1. Divorce decree states spouse is responsible for paying mortgage but the bank sees both names on the mortgage...
Can the divorce decree override the mortgage?

NO - Debts that were obtained in the name of both spouses before a divorce (meaning both the husband and wife signed a document or application saying that they were both responsible for the debt) remain the obligation of both parties after a divorce, no matter what a divorce decree says.

Why? Because both signed a legally binding contract with the creditor, and the divorce decree does not amend this contract. Amendment of any contract requires agreement by all parties (including the creditor). Proof of the amendment requires the signature of all parties. During a divorce, the creditors are not even consulted, let alone a part of the divorce courts, and therefore the original agreements/contracts stand.

2. What is clients responsibility to the IRS if no 1099-C is issued... ie no date of discharge defined by bank?

Without a 1099-C, there is no income to report.

3. The client may no longer be insolvent after 5 years...
Can the client claim 1/2 of the mortgage debt as income and claim insolvency now without 1099-C from the bank?

That's what the bank is hoping - that the debtor becomes solvent and can finally pay what they owe.
Once a 1099-C is issued, if ever, then the CODI would be split between the debtors.

Was the 1099-A "sale" reported in 2011?

Mike

[David1980]

So the taxpayer owes money and does not want to pay. The debt holder doesn't want to give up on collecting the debt.

Hmm, I suppose the taxpayer could file for bankruptcy. That'd probably do the trick?

[TaxTime829]

Was the 1099-A "sale" reported in 2011?

Yes... client received 1099-A dated 2011.

[Gary2]

NO - Debts that were obtained in the name of both spouses before a divorce (meaning both the husband and wife signed a document or application saying that they were both responsible for the debt) remain the obligation of both parties after a divorce, no matter what a divorce decree says.

However, the divorce decree may enable one spouse to get a judgement against the other spouse. Obviously if the lender couldn't collect from the second spouse, the first spouse may have trouble collecting as well. But there could be other legal issues to make it worth pursuing, or conceivably the first spouse might choose to pay off the debt immediately to avoid a bad credit rating, even though it's possible to collect from the second spouse over time.

Without a 1099-C, there is no income to report.

Not necessarily, because:

Hmm, I suppose the taxpayer could file for bankruptcy.

If successful, that would cancel the debt (to the bankruptcy estate) as of the bankruptcy approval, even though many lenders are late in issuing the 1099-C.

And that leads to the general question: Can the lender still collect on the deficiency? There are many states in which, even on a recourse loan, a foreclosure can cause the lender to lose other rights of action. In some cases, it may depend on whether the lender chooses a judicial or non-judicial foreclosure. In other states, there are different processes. In MA, for example, if the lender wants to recover the deficiency, then the the foreclosure notice must be sent a week earlier (21 days instead of 14) and must include the deficiency notice. If they don't follow the process correctly, they lose the right to recover, and the deficiency debt is canceled as of that event, with or without the 1099-C.

In this case, it's possible the lender is on the ball, and is correct in saying they have five years. But it may be worth asking a local real estate lawyer to be sure.

[appelman]

Definable event

Banks will often wait for a "definable event," such as resale of the foreclosed property, to issue the 1099-C. Until then, there is no COD income to report. However, there is usually a capital transaction, based on the 1099-A.

[taxea]

Client owned home with ex-spouse... home was foreclosed by bank... Bank issued 1099-A in 2011 showing borrower personally liable... No 1099-C issued to date... Called bank: They said they have 5 years to issue 1099-C and they don't know when they will issue it.

Client is currently an insolvent student ie. Student loan debt exceeds all assets...

Questions:
1. Divorce decree states spouse is responsible for paying mortgage but the bank sees both names on the mortgage...
Can the divorce decree override the mortgage?
2. What is clients responsibility to the IRS if no 1099-C is issued... ie no date of discharge defined by bank?
3. The client may no longer be insolvent after 5 years...
Can the client claim 1/2 of the mortgage debt as income and claim insolvency now without 1099-C from the bank?

1. I doubt it
2. Can't report what he doesn't have
3. what would he base the insolvency on without proper documentation?