1099-C for discharged mortgage

[rkg2004]

Hello all.

It's been a while since I posted, how are you guys doing?

Once again I'm looking for people who might have a similar experience. My debts were discharged in chapter 7 in 2010, including mortgage. The bank finally foreclosed in 2014 so I received a 1099-C cancellation of debt for the amount owed on the loan at the time bankruptcy was filed. I filed this with my taxes along with the proper form stating that the debt was discharged so it cannot be considered income.

So now (a month after our taxes were filed) we received a "corrected" 1099-C for the "fair market value" of the house, which is much higher than the amount of the loan. We are trying to contact our accountant but he is away now so we don't know what to do.

Has this ever happened to anyone? How can the bank cancel "fair market value" which is a completely made-up number rather than the actual amount of the loan?

Lost in NJ

[justbroke]

It's probably because their accounting was incorrect and they still need to report the right numbers to the IRS! (Because they have to file a tax return as well and if they are writing off the wrong amount or are entitled to write off a larger amount, then they should make a correction.)

The only affect this has on you is that your accountant may have you file an amended 1040 (1040X) to account for the corrected 1099-C... even though there is no net change in your tax attributes. (No change because you filed Form 982 to show that the loan was discharged in a Title 11 Bankruptcy proceeding and is not subject to taxation on the gain.)

justbroke's detailed response: The IRS says that "generally, the gross foreclosure bid price is considered to be the FMV. If an abandonment or voluntary conveyance to the lender in lieu of foreclosure occurred and you placed an “X” in the checkbox in box 5, enter the appraised value of the property." To me, that means that a foreclosure FMV should always be the bid (even if the creditor bid their "credit bid" up to the amount of the foreclosure judgment. The creditor should not be able to later sell the property, at a lower amount, and then send a corrective 1099-C with the "actual" price for which they sold the home. But that's just me.