Mortgage IIB 2 years ago/ VA compromise claim Question

[Tryingagain]

Hello! Hopefully someone can help me with this question. We filed for BK in 2008 and it was discharged 12/2009. Our home was included in the bankruptcy. We sold the home in a short sale and thought that we were done with the situation. The loan was a VA loan and we are looking into buying another property. I applied for the VA certificate of eligibility and received an email that we were entitled to 0 because of a compromise claim that was paid by VA. The eligibility can be restored if the amount is repaid. What is confusing us is if the property was IIB, shouldn't the debt of the compromise claim be included as well? It is debt associated with that property. This is the first time we have heard of owing the VA any funds and I assume that the only way they will try to collect is if we want the eligibility restored. Anyone have any experience with this?

[jmanford]

What the loan that was IIB a VA loan?

[Tryingagain]

Yes the loan was VA. We had no idea that the VA did a compromise claim because we did not sign any VA paperwork during the sale or receive anything after. I read that a VA compromise cannot be done with a second lien holder and we had a second mortgage that was also IIB.

[jmanford]

I'm no expert but I would think a short sale on a VA loan would negatively effect your ability to obtain a new certificate. Wouldn't you? Didn't the VA have to make up the difference in your short sale?

[Tryingagain]

I know that if they did a compromise sale that my ability to use it should be affected. My main concern is if I am liable for the debt with the VA because the mortgage was IIB. I also read that a requirement of VA compromise sales is that there cannot be a second lien. The eligibility letter I received also has two amounts listed as the amount charged- $23692 and $38698.

[jmanford]

Again, I am no expert, but doesn't it sound like that in order to use the VA loan again they are just requiring you to pay the debt you owe them from the short sale? However, I don't think that you are legally required to pay the debt. Meaning if you decided to use a different type of loan. Sounds to me like a little 'loophole' the VA is using. They can't make you pay the debt because it was discharged in BK, but if you want another certificate and to be able to use the VA loan benefits again, you need to make it right. That's just my interpretation. I could be wrong. You should just call them and straighten it out.

[tobee43]

Tryingagain, really i can't understand why the Va is not considering the mortgage debt relief act of 2007. which clearly would apply to your situation as you were insolvent at the time of the bk.

i do suppose they can chose whom they want to lend to. also, you are the first i have heard reappling for a VA loan. i do understand and it said that FHA wants you to have 3 years from the time of your foreclosure not your bk. (of course we all know a foreclosure can take years after your bk is discharged and closed).

the act itself was created by the governement to relief this type of debt forever, so i can't for the life of me figure out why another govenment agency would not honor the act which was created by the bush admin. to cover such situations. i would question them not honoring the spirit of the act and why it is they expect repayment. it is very clear under the act you are forgiven...provided your situation deals with the correct date timeline which it does. (the act is only in effect until 2012).

again, i would go higher up the VA food chain and at least question them about this.

best of luck to you!

[LostItAll2]

TB43 yes, I did also read about this debt forgiveness act. It is awful if the VA will not honor this type of situation. I do really wonder why. I am a Vet and do hope to use my VA, so this is concerning to me. I hope they don't say that to me, since our loan was an FHA loan.

[Tryingagain]

I am going to call the VA tomorrow and I will update the post with the info they give me. Is it possible that they just do not know that the mortgage was IIB? I haven't heard of the Mortgage Debt Relief Act. We received tax paperwork from Wells Fargo and our 2nd lien holder but it was forgiven. How would the VA compromise fit into the Act?

Thanks Again!!

[tobee43]

i think it may be worth your while to read this information on the act. i have part of it on a blog so i will copy and paste it for you to read if you would like. i hope it may help you, i know it has more information that you need for your situation, however as long as i'm doing it, i'm going to include some of the other quesstions that one may have pertaining to what the act covers:

here's the blog http://www.bkforum.com/entry.php?818...t-Cancellation but i will still copy and paste it so you don't have to go through all the clicking this also covers questions and some of the answers to what and who is covered by the act.


If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable. however, read on for more details.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.

The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:

What is Cancellation of Debt?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

. Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
. Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
. Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.

Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.

Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.


These exceptions are discussed in detail in Publication 4681.

What is the Mortgage Forgiveness Debt Relief Act of 2007?

The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does exclusion of income mean?

Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?

No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing
separately.

Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?

Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

How long is this special relief in effect?

It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?

The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.

If the forgiven debt is excluded from income, do I have to report it on my tax return?

Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

Do I have to complete the entire Form 982?

No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.

Where can I get this form?

If you use a computer to fill out your return, check your tax-preparation software. You can also download the form at IRS.gov, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.

How do I know or find out how much debt was forgiven?

Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

Can I exclude debt forgiven on my second home, credit card or car loans?

Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for further details.

If part of the forgiven debt doesn't qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not required to include forgiven debts in income to the extent that you are insolvent. You are insolvent when your total liabilities exceed your total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. Publication 4681 discusses each of these exceptions and includes examples.

I lost money on the foreclosure of my home. Can I claim a loss on my tax return?

No. Losses from the sale or foreclosure of personal property are not deductible.

If I sold my home at a loss and the remaining loan is forgiven, does this constitute a cancellation of debt?

Yes. To the extent that a loan from a lender is not fully satisfied and a lender cancels the unsatisfied debt, you have cancellation of indebtedness income. If the amount forgiven or canceled is $600 or more, the lender must generally issue Form 1099-C, Cancellation of Debt, showing the amount of debt canceled. However, you may be able to exclude part or all of this income if the debt was qualified principal residence indebtedness, you were insolvent immediately before the discharge, or if the debt was canceled in a title 11 bankruptcy case. An exclusion is also available for the cancellation of certain nonbusiness debts of a qualified individual as a result of a disaster in a Midwestern disaster area. See Form 982 for details.

If the remaining balance owed on my mortgage loan that I was personally liable for was canceled after my foreclosure, may I still exclude the canceled debt from income under the qualified principal residence exclusion, even though I no longer own my residence?

Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

Will I receive notification of cancellation of debt from my lender?

Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form.

What if I disagree with the amount in box 2?

Contact your lender to work out any discrepancies and have the lender issue a corrected Form 1099-C.

How do I report the forgiveness of debt that is excluded from gross income?

(1) Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income on line 2. Any remaining canceled debt must be included as income on your tax return.

(2) File Form 982 with your tax return.

My student loan was cancelled; will this result in taxable income?

In some cases, yes. Your student loan cancellation will not result in taxable income if you agreed to a loan provision requiring you to work in a certain profession for a specified period of time, and you fulfilled this obligation.

Are there other conditions I should know about to exclude the cancellation of student debt?

Yes, your student loan must have been made by:

(a) the federal government, or a state or local government or subdivision;

(b) a tax-exempt public benefit corporation which has control of a state, county or municipal hospital where the employees are considered public employees; or

(c) a school which has a program to encourage students to work in underserved occupations or areas, and has an agreement with one of the above to fund the program, under the direction of a governmental unit or a charitable or educational organization.

Can I exclude cancellation of credit card debt?

In some cases, yes. Nonbusiness credit card debt cancellation can be excluded from income if the cancellation occurred in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See the examples in Publication 4681.

How do I know if I was insolvent?

You are insolvent when your total debts exceed the total fair market value of all of your assets. Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts.

How should I report the information and items needed to prove insolvency?

Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent immediately before the cancellation. You were insolvent to the extent that your liabilities exceeded the fair market value of your assets immediately before the cancellation.

To claim this exclusion, you must attach Form 982 to your federal income tax return. Check box 1b on Form 982, and, on line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately prior to the cancellation. You must also reduce your tax attributes in Part II of Form 982.

My car was repossessed and I received a 1099-C; can I exclude this amount on my tax return?

Only if the cancellation happened in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See Publication 4681 for examples.

Are there any publications I can read for more information?
Yes.

(1) Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) is new and addresses in a single document the tax consequences of cancellation of debt issues.

(2) See the IRS news release IR-2008-17 with additional questions and answers on IRS.gov.

[StrawberrySu]

Tryingagain, I have a va loan on a home we are including in our bk. We were told that the VA didn't have to pay out the insurance premium in a short sale, and that was why most banks prefer to foreclose, it is the only way to collect the mortgage insurance. Not sure if this is correct tho.

[tobee43]

Tryingagain, I have a va loan on a home we are including in our bk. We were told that the VA didn't have to pay out the insurance premium in a short sale, and that was why most banks prefer to foreclose, it is the only way to collect the mortgage insurance. Not sure if this is correct tho.

strawberrysu, are you referring to the PMI??? because i know the FHA must foreclose prior to being able to collect on the mortgage insurance, it's a "process" or guidelines before they can collect, but one would think if they did collect from the mortgage insurance why then would they tell OP to pay off the debt??? hence, the mortgage relief act should hopefully be helpful in this situation, at least one would hope?

[BobMango]

Here is an explanation that may help folks understand what is going on with the OP. It has nothing to do with the Mortgage Forgiveness Debt Relief Act of 2007.

Q: How does a VA compromise claim payment work?

A: When a veteran attempts to sell his or her home and the expected proceeds from the sale are not enough to pay off the existing loan, and the veteran has no other source of funds to complete the transaction, a VA compromise claim pays the difference. As with any claim payment by VA, the veteran usually remains liable to VA for the amount of the claim payment. However, the compromise claim is usually less than the claim which would have been payable if the sale had fallen through, the veteran had failed to make the loan payments, and the lender had foreclosed on the loan.

It there was a second and the amount was judged to be insignificant then a compromise sales could still proceed. The bottom line is that the OP is not responsible for paying the loss because of the bankruptcy, but that does not mean that their full VA eligibility has been restored. Since the VA has taken a loss they will not generally restore your VA entitlement without being compensated for the loss. You could repay the VA and get your entitlement restored, but the only real advantage to doing this instead of using that money for a down payment is that VA allows underwriters to disregard bankruptcy after 2 years instead of 3 for FHA.

[BobMango]

TB43 yes, I did also read about this debt forgiveness act. It is awful if the VA will not honor this type of situation. I do really wonder why. I am a Vet and do hope to use my VA, so this is concerning to me. I hope they don't say that to me, since our loan was an FHA loan.

You will not have a problem with the VA unless you had a VA loan that they took a loss on. An FHA loan loss will not impact your eligibility for a VA loan.

[tobee43]

Here is an explanation that may help folks understand what is going on with the OP. It has nothing to do with the Mortgage Forgiveness Debt Relief Act of 2007.



It there was a second and the amount was judged to be insignificant then a compromise sales could still proceed. The bottom line is that the OP is not responsible for paying the loss because of the bankruptcy, but that does not mean that their full VA eligibility has been restored. Since the VA has taken a loss they will not generally restore your VA entitlement without being compensated for the loss. You could repay the VA and get your entitlement restored, but the only real advantage to doing this instead of using that money for a down payment is that VA allows underwriters to disregard bankruptcy after 2 years instead of 3 for FHA.

i'm not really certain about that. we attempted a VA after 2 years and were denied. our previous loan was an FHA. since we never used our Vets status to get a loan we figured it was an option after two years out of bk. it wasn't.

the op say that the VA wants the loan repaid. why??? as i stated it the amount written off should have been forgiven under the act. so i do believe it does apply here when the op is asked to repay the loan to reinstate status to borrow again.