taxes with chapter 7

[WhisperCat]

What is the name of your state? Tennessee

My husband and I filed chapter 7 last year because we found a lot of structural damage to our house and couldn't afford to pay the mortgage (and other bills) and fix the damage. We received a form 1099-A from the mortgage company and noticed that they had reduced the fair market value of the house by about 25% than it had been originally when it was appraised the previous year. This put the value of the house below the loan amount. They also checked the Yes box to the "was the borrower personally liable for repayment of the debt" question. Our accountant says that we now have to pay taxes on that difference.

My question is this: I thought chapter 7 was supposed to discharge the entire debt, therefore we were not personally responsible for any taxes on the mortgage company's loss? (The accountant said that they should not have reduced the fair market value and they should have checked the No box) If we are not responsible, can we call the mortgage company and get them to change it? Or is this something our bankruptcy lawyer should take care of?

 

[InsulinRules]

Your accountant is incorrect (based on the information you supplied).

You do not owe taxes on this transaction (the abandonment of the home) as the debt was relieved thru Chapter 7.

A 1099A was sent to you because the IRS requires it now. It does not mean you automatically owe taxes.

The IRS demands that this information be sent by LENDERS to debtors for several reasons:
1) Debtors who have their debts relieved by means other than BK will have to report the amount of relief as income;
2) LENDERS (who are not ALL big corporations) can't blithely charge off "bankruptcy debt". This a check on the lender to keep them from overstating their losses.

 

[WhisperCat]

Thanks. That's what I thought.