Bank Foreclosure and the IRS

The Bank foreclosed on my home and sent me an IRS Form 1099. My accountant says this will cause me to owe the IRS! Can bankruptcy help?

Most likely, yes. Here’s the deal:

When you took out a loan to buy your house there were 2 primary documents that you signed: (1) The promissory note (or “note”) in which you agreed to repay the Bank for the money it loaned you to purchase the house; and (2) The Deed of Trust, which gave the Bank a lien on your house allowing it to foreclose in the event that you didn’t repay the note. Together, these 2 documents are called a mortgage.

Fast forward: if you weren’t able to pay the mortgage then the Bank eventually foreclosed and sold your home. In today’s poor real estate market the Bank likely did not receive enough money from the foreclosure sale to repay the amount that you owed on the note. This difference is called a deficiency.

Now, just to make sure we’re on the same page, a deficiency is the difference between the balance owed on the note (for our purposes we’ll use the number $150,000) and the amount that the Bank received at the foreclosure sale (for our purposes we’ll use $125,000.) Based on our hypothetical figures, the Bank is still owed $25,000 after the foreclosure:

Balance due on the note:                                                    $150,000

minus        Amount the Bank received at foreclosure:                      $125,000

equals        Amount still owed under the note/ the deficiency:      $25,000

So, you still owe the Bank $25,000 after the foreclosure sale.

At the end of the year (or in January of the year after the foreclosure) the Bank will send you an official Form 1099 stating that the $25,000 deficiency that you owe is income to you. Yes, income. Here’s a link:,-Cancellation-of-Debt

Let me say that again in a different way: The IRS takes the position that, since you received $150,000 (for the mortgage) and only repaid $125,000 (via the payments you made, plus the proceeds from the foreclosure sale), the unpaid deficiency of $25,000 is actually income that you earned. A Form 1099 is the form that is sent out to someone who receives income from someone else. The Bank will send you a Form 1099 for $25,000. When you receive a Form 1099 you have to report it to the IRS on your tax return as income. As you know, you are taxed based on your income. The $25,000 reported on the Form 1099 will increase your annual income by $25,000.

This leaves you in the position of not only being kicked out of your home, but also owing the Bank $25,000. AND, the kicker is that you owe the IRS income tax for the $25,000 “income” that you made from the Bank!

Can Bankruptcy help?

Usually, yes. A debt that is discharged in bankruptcy is NOT considered to be “income” on your tax return. This means that, if you timely file a bankruptcy petition, the $25,000 that you owe the Bank will be discharged (ie, it will be extinguished) AND it will not be added to your income for tax purposes. So, you will not owe the IRS based on the deficiency “income” that you made due to the foreclosure. When you file your tax return you will also file an IRS Form 982 in which you assert your bankruptcy discharge as a bar to including the 1099 deficiency amount as “income”. Here’s a link to information about Form 982:,-Reduction-of-Tax-Attributes-Due-to-Discharge-of-Indebtedness-%28and-Section-1082-Basis-Adjustment%29

At Kight Law Office we represent people in Asheville needing help with foreclosure, debt relief, bankruptcy, and tax problems. Call us. We’d like to help.