1099

[mountanddo]

My BF has a house that he has a HELOC with Wells Fargo. They told him today that they are going to charge off the debt and send him a 1099. The amount he owes on the HELOC is 40k. I thought that they could only send a 1099 if he settled the debt. He is not going to settle and will be filing BK. Is he going to owe taxes on the HELOC on 40k if they just charge it off and he doesn't settle?

Also can the HELOC charge off the debt during the redemption period? It is going to sheriff sale tomorrow.

[HHM]

Yes, the foreclosure can trigger the forgiveness of debt. Foreclosure destroys the 2nd mortgage. The 2nd mortgage then can either collect (if state law applies) or forgive and issue 1099. Whether the debt will count as income, will depend on whether he can use one of the exceptions on form 982.

[mountanddo]

So if they forgive the debt and issue a 1099 does that mean that he doesn't owe them any more? Will it show a zero balance on his credit report then?

It will likely show as foreclosed or charged off, there is one exception in the tax code that allows the bank to issue a 1099 and still collect, but it is uncommon. Credit report is the least of his concerns.

[Miknan]

You can get a 1099 if the 2nd is included in bk?

[mountanddo]

I don't think you get a 1099 if it is included in BK right? HHM, you edited my post to respond instead of replying so I didn't see this until today

[HHM]

I don't think you get a 1099 if it is included in BK right? HHM, you edited my post to respond instead of replying so I didn't see this until today

Gray area. If the debt was forgiven PRIOR to filing BK, you may still have the tax issue. The most conservative commentators state that you must file BK prior to the foreclosure or short sale to avoid forgiveness of debt income. My opinion differs a little, when you look at the IRS rules for issuance of a 1099-C, the "act" of forgiving the debt is a separate event from the foreclosure or short sale. So, although the foreclosure or short sale is a taxable event (transfer or real estate, hence 1099-A), forgiveness of debt income is triggered by the creditor actually deciding to forgive the debt, which can happen at any time. But to my knowledge (not that I have exhaustively searched) no court has weighed in on the topic.

[tobee43]

Gray area. If the debt was forgiven PRIOR to filing BK, you may still have the tax issue. The most conservative commentators state that you must file BK prior to the foreclosure or short sale to avoid forgiveness of debt income. My opinion differs a little, when you look at the IRS rules for issuance of a 1099-C, the "act" of forgiving the debt is a separate event from the foreclosure or short sale. So, although the foreclosure or short sale is a taxable event (transfer or real estate, hence 1099-A), forgiveness of debt income is triggered by the creditor actually deciding to forgive the debt, which can happen at any time.

yes, however, in most cases one needs to prove they were in insolvent to take advantage of the act. is your bk going to file bk??

one would think if one filed shortly after or can prove the provisions listed under the act which would make the write off a non tax issue would hopefully apply. there are criteria to apply the act to allowed one's cure on the debt.

[HHM]

yes, however, in most cases one needs to prove they were in insolvent to take advantage of the act. is your bk going to file bk??

one would think if one filed shortly after or can prove the provisions listed under the act which would make the write off a non tax issue would hopefully apply. there are criteria to apply the act to allowed one's cure on the debt.

BK is one of the exceptions, if you filed BK at the right time, you don't need to prove insolvency.

I should point out, the person probably will RECEIVE a 1099-C, the bank will simply issue it; it will be up to the tax payer to file form 982 and except themselves from paying income tax on the forgiven debt.

[tobee43]

BK is one of the exceptions, if you filed BK at the right time, you don't need to prove insolvency.

I should point out, the persona probably will RECEIVE a 1099-C, the bank will simply issue it; it will be up to the tax payer to file form 982 and except themselves from paying income tax on the forgiven debt.

hope so! i did think there were certain criteria involved whey applying the act for forgiveness of the debt. i just know bk is one way to prove insolvency, if need be nothing says it better than a bk. so, one would consider the bk filing itself as substantial enough. yes, the 982 will be up to the party to file, and most likely with all of the 982s being filed this up coming tax season it will not look out of the norm.