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socrateaser
socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 33571
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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In 2010 I paid $44,000 mortgage interest and filed for Chapter

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In 2010 I paid $44,000 mortgage interest and filed for Chapter 13 bankruptcy. When I received my 1098 for the year however only half of the interest was being report. I called the bank and they said that even though I paid the $44,000 in interest, they would only report half because of the bankruptcy. The mortage was not included in the bankruptcy. This has huge ramifications for my family since it leaves us owing a substantial amount as opposed to nothing. Is this legal? How can I not be given credit for interest paid?
Submitted: 3 years ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 3 years ago.
Hello.

I must confess that I do not know what the bank is thinking. Treas. Reg. 1.163-1(b), provides: "Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness."

The only thing that comes to mind is that at the moment of the filing of the bankruptcy petition, all property owned by the debtor becomes the property of the bankruptcy estate. However, at the date of plan confirmation, all property not administrated by the trustee is revested in the debtor. So, at most, the argument that you were not the legal or equitable owner of the property would only hold from the date of filing of the bankruptcy petition, until the date of plan confirmation. This could reduce your deductable interest, but certainly not by one half, unless your Chapter 13 plan required 6 months of the year to confirm.

I have researched the applicable statutes and case law, and I find nothing that provides a contrary view on this issue. So, while I cannot definitively say that you should calculate your interest by taking the full year and then subtracting any payments made from the date of the filing of the bankruptcy petition until the date of plan confirmation -- that is probably what I would do, and then when the IRS sends an audit letter, I would explain my position, and hope it was accepted without a battle.

Hope this helps.

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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 33571
Experience: Attorney and Real Estate Broker -- Retired (mostly)
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