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Have an extremely specific 1099-C question...not looking for

shoulds/probablys/discretion of the court/etc. type...
Have an extremely specific 1099-C question...not looking for shoulds/probablys/discretion of the court/etc. type answers...looking for definitive/case specific answer.
I had (non-primary residence) mortgages discharged in a Chapter 7 about 3 years ago. I did not reafirm any of them.
Prior to the discharge, and through to today, I challenge the foreclosure processes (via all the standard motions/filings/answers/demands/etc.). I am not paying the mortgages, but I do happen to be collecting rent.
I will (obviously) loose the properties to foreclosure at some point, possibly even 5,6,7+ years from the date of the discharge.
I understand that the banks should file 1099-Cs, with the bankruptcy box checked, and if it is not checked I should fill out Form 982. Based on this scenario, I have the following question(s).

Given the fact that I've challenged the foreclosures post bankruptcy filing, have I "forfieted" my bankruptcy protection, and so do the 1099-Cs become valid and reportable as "income"?

Since these legal actions have essentially allowed/facilitated an increase in the amount of the discharged debt (legal fees, taxes paid, interest, etc.), am I responsible for the increased amount, or even all of it because of such actions?

Does the timing of the 1099-C in relation to the bankruptcy filing play a part in any of this?

Again, really looking for a definitive answer, as I really need to know if I need to prepare for 1099-C tax burdens. Thank you for understanding.
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Answered in 2 hours by:
3/23/2013
JoeLawyer
JoeLawyer, Attorney
Category: Bankruptcy Law
Satisfied Customers: 767
Experience: Attorney in the practice of Bankruptcy Law since 1996
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HiCustomer

You are obviously already well-studied in this area. As I was reading your question, I started formulating an answer in my head, and I thought "debts discharged in bankruptcy is not a taxable event" and then you indicated you knew that; then I started thinking "Form 982" then you indicated you knew that, so let's see if I know anything you haven't already figured out for yourself...

Questions:
Given the fact that I've challenged the foreclosures post bankruptcy filing, have I "forfieted" my bankruptcy protection, and so do the 1099-Cs become valid and reportable as "income"?

When a Discharge is entered in bankruptcy, the liability is discharged and thus no taxable event will occur even if the creditor attempts to call the debt "forgiven" thereafter. The only things that normally can bring a debt back in to play were if the debt had been reaffirmed during the bankruptcy case, or if the debtor refinanced afterward, and then defaulted. If no reaffirmation agreement or subsequent refinance took place, then there is no debt to be forgiven to be considered income.

Since these legal actions have essentially allowed/facilitated an increase in the amount of the discharged debt (legal fees, taxes paid, interest, etc.), am I responsible for the increased amount, or even all of it because of such actions?


I doubt if you will find a concrete answer on this, since the accurate answer is "If the judge says you are." Normally, no - the debtor will not be held accountable for any increases in the amount owed since the debt owed by the debtor was discharged, and generally the creditor will have to try to get their claim - including the increased amount from post-bankruptcy litigation - from the sale of the collateral only. I can say that I have never had a client get stuck with post-bankruptcy damages related to ongoing litigation. BUT... this is not to say that I think a judge couldn't or wouldn't assess damages if the judge thought the additional post-bankruptcy litigation was excessive or prosecuted only to stall the proceedings. In other words, all liability of the debtor related to the Note is discharged, but it is not impossible for the debtor to incur post-bankruptcy liability for abuse of process or intentional tortious acts post-bankruptcy, though it is really rare for a creditor to attempt to stick that type of ex post facto liability on the debtor. My guess would be that the debtor would not be liable for any of the post-bankruptcy litigation unless the debtor excessively stalled the proceedings to the point that the judge deems it a sufficiently egregious abuse of process to start attaching liability to the debtor.

Does the timing of the 1099-C in relation to the bankruptcy filing play a part in any of this?

That's a little vague so I'm not sure if this answers your question: it might. If the 1099-C is issued prior to the bankruptcy, then it is theoretically possible that the IRS will deem the debt forgiven prior to it being discharged, and thus a taxable event notwithstanding the subsequent bankruptcy. However, that is theory; not necessarily practice. I have had a few clients get a 1099-C, then we filed bankruptcy shortly thereafter, and the 982 evidently still kept the IRS from pursuing the debtor for taxes on the forgiven debt. Though, it is possible that the IRS didn't drop it because of the 982 but because they deemed the debtor insolvent, which is of course another way to avoid the taxable event when debt is forgiven. The IRS may assume that since the debtor filed bankruptcy shortly after the debt was forgiven, that the debtor was most likely insolvent when the debt was forgiven, so the IRS drops it. It's hard to say. Other than that response, I'm not sure what you are looking for with this question, so if I missed the mark let me know!

Good luck,
Joe

LEGAL NOTICE: I am only licensed to practice law in certain state(s) and I cannot give legal advice to someone who does not reside in a state in which I am licensed, nor shall anything I say in the above answer or elsewhere on this site be deemed legal advice, even to someone who resides in a state in which I am licensed. Funds I receive from JustAnswer.com are gratuities paid to me for taking the time to respond to questions, not for legal advice. This forum is designed to provide general information only, and information herein is not warranted to be correct or applicable in any way since laws may have been misinterpreted herein, since laws change from time to time, and since the impact of those laws on any particular situation varies. The information presented in this site shall not be construed to be formal legal advice nor the formation of an attorney-client relationship. Persons accessing this response are encouraged to seek independent legal counsel in their jurisdiction for guidance regarding their individual circumstances. Do not take any action or inaction based on information presented herein since it is informational and may not be accurate or applicable to you; it merely attempts to give you a basis of knowledge to help you formulate questions to ask a legal or other professional in a face-to-face meeting in your jurisdiction. JoeLawyer is an attorney but does not hold himself out to be a specialist or expert in any area, regardless of assertions made by any third party, and any implication of being an expert or specialist herein is made in error. I hope the information presented above is useful to you. Answer above is (c) JoeLawyer. All rights reserved.
JoeLawyer
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Experience: Attorney in the practice of Bankruptcy Law since 1996
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