First things first . . . the recent credit bust and changes in the housing market has caused many financial institutes and mortgage lenders to be merged or bought out. Since lenders have different interpretations as to when a 1099-A and/or 1099-C should be issued, a lot of the paperwork is currently in a mess. That said, it is always a good idea to notify your bankruptcy attorney as well as your tax accountant when you receive either IRS form.

Generally speaking, the IRS requires a creditor (such as your mortgage lender) to issue a 1099-A when a borrower abandons real or personal property. This is a common occurrence for homeowners who file a chapter 7 bankruptcy prior to a foreclosure sale. So, at some point following the trustee's discharge, you may or may not receive a 1099-A in the mail. It is important to understand that this does not represent a forgiveness of debt by the creditor but simply notifies the IRS of the "abandonment of property".

When a financial institution files a 1099-C, it is an official notice to the IRS that they have forgiven or cancelled a debt of $600 or more. The difference in the amount you owed and the foreclosure sale price (often shown as Fair Market Value or FMV) creates a tax liability that is considered to be income. At this point, you are required to report this amount to the IRS. However, if the cancelled debt is on your primary residence, the Mortgage Forgiveness Debt Relief Act allows your tax accountant to file a Form 982 and exclude this amount.

Although Florida is a recourse state, once a lender has filed a 1099C, it would be unlikely that the financial institution would ever pursue you for the deficiency. Unfortunately, mortgage banking paperwork will still be in a mess for a while and stranger things have happened. So, protect your legal position by working closely with your Jacksonville bankruptcy attorney and provide your tax accountant copies of tax-related forms in a timely manner. If you have not already filed bankruptcy and are facing foreclosure, contact the Law Offices of Keith D. Collier for your FREE consultation at 904-981-8100.