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What Happens When the Bank Issues a 1099-C on Your Home Loan? Maybe Nothing.


As you may know, a judgment of foreclosure doesn’t just mean that your property can be taken from you. It also can mean a potential money judgment down the road, if you owe more than what the property is worth when its foreclosed on.

The Effect of a 1099-C

Many borrowers receive what they think is a “golden ticket”: A 1099 from the IRS indicating that the bank has forgiven some or part of the amount owed on their loan. Many borrowers think that they own their home free and clear, and are not just immune from a money judgment from the loan, but that the IRS’ forgiveness is a complete defense to the foreclosure.

But a recent case has put the brakes on that theory. In the case, a couple was being foreclosed on, and the bank provided them a modification. The modification said that if the balance was paid off timely, a part of the loan would be forgiven. The couple did not comply with the agreement, and the bank foreclosed.

However, the bank did issue a 1099-C with respect to the amount that was supposed to be forgiven had the modification been complied with. The couple thus argued that the possibly-forgiven amount had to be excluded from the judgment because, they argued, a bank can’t both issue a 1099 and still collect that money from debtors or borrowers.

1099-C May Not Preclude Collection

Some courts say that a 1099-C is used for reporting purposes, but doesn’t indicate that debt has in fact been forgiven. Many cases have even said that a 1099-C doesn’t preclude a creditor from seeking to collect on that same debt.

Ultimately, the court in this case found that because there was no money sought by the bank, they didn’t have to decide the effect of the 1099-C. In other words, the issue of whether a portion of the debt was forgiven didn’t matter since the bank wasn’t going after the (former) homeowner for any money.

What About Surplus?

This of course ignores the issue of surplus. When someone’s home is sold at foreclosure for more than what is owed, the owner may be entitled to some or all of the extra money. If a portion of indebtedness was to be forgiven, there may be additional proceeds from the foreclosure sale of the home that belongs to the homeowner (or which otherwise could be used to pay other liens on the house, including second mortgages).

That means that the question of how much is owed is not moot or irrelevant just because the bank doesn’t seek a money judgement against the homeowner.

Regardless, the court did not specifically say that a 1099-C was automatic evidence of a debt being excused or waived, meaning that homeowners who get a 1099-C for anything related to their mortgage should not assume that their loan has been forgiven or “written off.”

If you’re in foreclosure you need attorneys that understand the details of not just state, but federal laws as well. Contact Jacobs Legal in Miami for a free consultation about helping you through the foreclosure process.


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