too late to file or even need to?

[cityevader]

Hello, just found this site and have some questions. Some background first:

I purchased my first home back in '02, put $42k down, and intended on living there for a very long time. It was an old house (cabin) from the 30's that was added onto many times over the decades in a ramshackle way. Inspectors told me right to my face that it's a mountain cabin, but in good shape, no problems with septic, no structural issues, etc. My realtor "did his thing" to get me a good loan. Over the years I sunk about $25k cash into the place, and during the course of learning curve of remodels discovered the house was barely built at all. Extremely unsafe, no foundations, terrible terrible. I tried to re-fi to perform repairs and couldn't due to low income and found out my realtor had ALTERED my income by adding a 1 in front of my 58,000 stated income to make 158K!!! A few years later i tried to sell it, and my septic inspectors revealed I HAD NO TANK!!! just a hole in the ground. inches away from the house. At this time the house started sinking on that side. Needless to say nobody wanted to buy it. I eventually got re-fi and pulled close to $20k out to do septic and foundation work myself which saved loads of money but revealed it was impossible to make the house level due to the way it was built. (long story so won't detail).
So bottom line the house truly needs to be torn down and rebuilt. Lawyers said I don't really have a case against anybody, and should just walk away from the house. I asked him and CPA about ramifications and they said I'd still have to pay back the second mortgage for repairs, and the odds of the first mortgage company suing for losses were small, plus it would cost $8000 to file bankrupcy so why bother. So I walked away 2years ago this coming May. One year ago May the bank finally foreclosed.
Now I got 1099 income forms from both lenders (I've been continually paying the 2nd down) and now find out i'm liable for txes on the difference of owed vs what they sell it for?!?!? But maybe not because balance was over $400k and it's worth well below $300k now. Insolvency?
Is it too late to file bankrupcy since i already got 1099? Is there any benefit to filing now? Can they all, including the government, still come after me?

Crying in despair.

[LadyInTheRed]

If you are insolvent, you won't need to pay taxes on the income reported on the 1099. But, insolvent is your total of all debts being more than the total of all your assets. So, if you have other assets, you could be solvent even if the house was underwater. Ask your CPA to help determine if you have to pay tax on the income. But, don't ask your CPA whether you should file BK. Get all of your debt, asset, income and expense info together and get a couple of free consultations with BK attorneys. For anyone here to comment on whether BK appears a good option for you, we need to know more about your overall financial picture.

[debee]

You should check out "The Mortgage Forgiveness Debt Relief Act & Debt Cancellation" publication at the IRS.

http://www.irs.gov/individuals/article/0,,id=179414,00.html

If you lost your principal residence to foreclosure between 2007 & 2012, you don't pay tax on the forgiven debt. So long as the debt was used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes, you have no tax liability.

You don't need to file bankruptcy or be insolvent to avoid paying COD income tax.

[cityevader]

ballpark numbers are $402K on 1st and $9K on 2nd. No other debts at this time, although 2 years ago when I walked away there were two car payments being made.

My only substantial assets are my car and motorcycle blue book value of $5K, tools (mechanic by trade) approx $20K. 401K of $10k.

Then how about silly things like furniture, TV, computer, etc that were all second hand/freely acquired figured in? Does somebody physically come look at what I have and put a value on it?

Additionally, the 2nd mortgage (with receipts for Septic/foundation work on house) of $9K, is that really required to repay? I was told so, but if filing BK could eliminate that, it'd be great....I'm now wishing I'd gotten a second opinion as to the cost of BK being $8K, as I've spent that amount already paying down the 2nd since leaving the house.

[LadyInTheRed]

I meant to mention that BK will not cost $8k, unless you have to file a Chap 11 or have complications in the BK. If you have to file a 13, then you likely would make $8k or more in plan payments over 36 to 60 months, but that's paying debt off at a discount. But, I think the cost of BK may be irrelevant to you.

If the 1st mortgage is the original mortgage you used to purchase the home, they can't go after you for a deficiency. I believe if the 2nd sent you a 1099, they aren't coming after you for a deficiency either. Why are you continuing to pay that mortgage?

Even if they did come after you for the deficiency, a $9k debt is not worth filing BK. If you do have a tax liablity, it probably is not dischargeable for at least 3 years after you file your return. But, it sounds like you will not owe taxes anyway. Look at the law debee referred to. It sounds like your only possible issue other than tax liablity is the 2nd mortgage. Give the 1099s to the CPA, have him prepare your tax returns and see where you are at.

As far as determining whether you are insolvent, I think you do need to include the value of your personal property, but nobody is going to come look at your personal property unless maybe your tax return is audited. Paying a CPA to figure this out for you is money well spent. If you end up owing taxes, your best option may be to enter a payment plan with the IRS.

[cityevader]

sorry if vague. The 1st mortgage is not original, but re-fi''d. I stopped paying that one. I've been paying down the 2nd because the lawyer guy said i'd be responsible for that one no matter what and that wages could be garnished, so I chalked it up as yet another lesson learned the hard way. I assumed that BK wasn't worth it for what little was owed on the 2nd.

I panicked because I got the 1099's and what I read online was that even though the house hasn't been sold (terrible house in a terrible market likely will never sell) I'd still have to calculate tax based on "estimated" sale price vs balance owed.