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Ask Chad Oberg Your Own Question
Chad Oberg
Chad Oberg, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 174
Experience:  10 + years of accounting and tax experience, financial statements and business planning
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I am in default on a second mortgage loan of my personal residence

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I am in default on a second mortgage loan of my personal residence in California. The bank just made me an offer to settle the $68923.69 debt by paying one final payment of $17,231.00. The bank said they may be required by law to report this settlement to taxing agencies as a forgiveness of $51,692.69 of debt. My questions are:
1. Will I have to report this amount of forgiven debt as income for the 2010 tax year?
2. For tax purposes, can I spread this $51,692.69 of forgiven debt over more than one year?
3. Is it still considered forgiveness of debt in view of the fact that I am losing the house this Friday at a foreclosure sale to satisfy the first mortgage?
4. Do you know of any way I can protect myself from paying taxes on this forgiven debt?
5. Will it make any difference if I pay the $17,231 settlement of the second mortgage before the foreclosure sale this Friday. Or, will it help me taxwise if I pay off the second mortgage after I lose the house?
Submitted: 7 years ago.
Category: Tax
Expert:  Chad Oberg replied 7 years ago.



You may be better off going through the steps of filing out IRS Form 982 and presenting that you were insolvent (if possible) right before the property was lost.


1. Yes, unless you qualify for an exclusion from income (see below attachments). Many people do qualify for the exclusion once they determine they are insolvent.

2. No, not based on my current research. There is a provision for business.

3. Yes it is still forgiveness of debt

4. See below

5. It may effect your credit rating. However, I don't know if this will have a significant impact.


Take a look at the following attached website from the IRS that help people with these questions:,,id=179414,00.html,,id=179073,00.html,,id=184704,00.html,,id=179414,00.html




IRS Publication 4681


IRS Form 982



The process is complicated; however, it will help protect you from the tax. You may want to get a qualified CPA to help you through the process.


If you have any further questions, please do not hesitate to contact me.





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