My client was foreclosed upon. He got a legal services lawyer to get the foreclosure overturned because the lender did not properly follow the state laws when they foreclosed. The law states that in such a circumstance the lawyer for the plaintiff can have their fee paid by the mortgage holder. The lawyer and the bank settled on $5,000 which went directly to the lawyer. My client got no compensation. He did get to keep the house at least for now. If this were a tort case, other than for discrimination , the 1/3 of the settlement that went to the lawyer would have to be reported as income and my client would have to claim a Schedule A deduction for it. To me this is different. By law, the bank was obligated to pay the lawyer. I think the $5,.000 should not be taxable to my client. Who agrees or disagrees?