Day 368: Can I pay my taxes yet? Pleeeeease?

Credit Score: 678

Hello once again fellow defaulters -

Sorry for the long hiatus! I’ve been planning to write since January but I kept not getting the tax document saying the condo was foreclosed, so kept waiting, kept thinking “it’ll come tomorrow”. But now it’s March and the document has not come. I’ve learned a lot and thought I should finally share, even though I’ve made no progress.

First off, the Mortgage Forgiveness Debt Relief Act was extended by Congress in their fiscal cliff deal in January. It now covers any debt forgiven in 2013 too. I’m sure that’s a big sigh of relief for everyone still waiting for their bank to get their act together. There’s no guarantee it’ll be extended to 2014 though, and with the sequester now in place, there’s no guarantee Congress will pass anything any time soon.

Next up, I learned I did something stupid – not irreparable! but stupid. : ) I did not read the First Time Home Buyer’s Credit documents very carefully. On my 2011 taxes, I paid back half the credit because I knew that I’d have the foreclosure in 2012 and would owe the rest of it. Instead of risking having a large tax credit to repay around the time I may have a very large tax debt to pay, I decided to divide the blow. But now I’ve learned that because I’m taking a loss on the sale of the condo, I don’t owe any of it. That means that of the $3500 I paid last year, I can get $3000 back! (I do still have to pay what was due in 2010 and 2011) I will have to go through the trouble of amending last year’s taxes, but it sounds not too hard. There’s one form to fill out and file, but it has to be filed on paper, not electronically, and it takes a while to get the refund. Totally worth it for $3000 though.

Now, the epic story of my 1099 tax documents for the foreclosure. By January 31^st of the year following your foreclosure, you should receive a 1099-A from your bank. It’s not required to file your taxes and just shows evidence that they’ve acquired your property. What is required for your taxes is the 1099-C for cancellation of debt. By January 31^st of the year following your cancellation of debt, you should receive a 1099-C from your bank. If those happen in the same year, the bank can skip the 1099-A and just issue the 1099-C instead.

When I had not received either from the bank by February 7^th, I emailed them and asked for a copy. They said they’d sent it right away and it should arrive in a week. A week later, still nothing, emailed again, waited a week again. I finally got angry enough that they weren’t mailing me a simple piece of paper that I started calling in addition to continuing to send angry emails. After four phone calls in one week, a call to the IRS, an email to my lawyer, five emails to the bank, four promises of a fax “in 24 hours”, and two supervisors of the call center involved… still nothing. But here’s what I’ve learned that you can benefit from too.

1.  Date of foreclosure and date of debt forgiveness are two different things.  The bank told me that a 1099-C would take 6-9 months from the date of foreclosure to allow them time to pursue any further judgments against a home owner.

2.  The IRS agrees with this. Foreclosure does not mean your debt is forgiven on that date, so the bank can take as long as they darned-well please to cancel your debt.

3.  In Washington State, the date of foreclosure and the date of debt cancellation ARE the same thing.

4.  Banks don’t care about following state laws until you threaten them. (And maybe not even then)

Here’s how Washington makes foreclosure and debt cancellation the same day -

There are two types of mortgage loans: recourse, and nonrecourse. In a recourse loan (which most states have), the bank can take your house back and demand the rest of the money they’re out. In a nonrecourse loan (which a few states have) they only get the house. However, Washington is neither of these. The debt starts as recourse which means I’m liable for that debt. But then, the bank can choose to either sue me to get their money or take the house – not both. It works like this:

Let’s say I go to my brother and borrow $100 to buy a guitar. I go out and buy it, but when I get it home, I discover it was really only worth $50 so I don’t want the guitar anymore. In a recourse state, I’d go give my brother the guitar and he’d shake me upside down by the heels until all my remaining money falls out. In a nonrecourse state, he’d just get the guitar. But in Washington, he can choose. Does he think he’ll get more value by shaking cash out of my pockets, or by reselling the guitar?  By choosing to take the guitar, my brother gives up his right to any money in my pockets. This means that, logically, the debt is forgiven by the conclusion of the trade – automatically and by definition. Therefore, any Washington state foreclosure in 2012 had its debt forgiven in 2012 and was consequently owed a 1099-C by January 31^st.

Once I brought that argument to the bank, and demanded to talk to a manager, I got the attention of people who could make things happen. Despite them having already missed six deadlines that they told me they’d meet, including the one the federal government gave them, I’m slightly hopeful that this seventh deadline will actually be met. So I’m giving the supervisor until Monday the 11^th to investigate and get me my 1099-C. They say they’ve “escalated it internally” so perhaps I’ll get one.

If not, I can go to the IRS, tell them that, because I’m in Washington, my debt was necessarily cancelled and they can go to the bank and demand the 1099-C. Or fine them, or something… hopefully. I can also go to the state Attorney General and have him look in to it. The bank is ignoring state law by not recognizing that my debt is already cancelled, and that’s what the Attorney General does, isn’t it?

Lastly, I’ve also been watching my credit report closely. My score is up! I’m only down 100 points from the start now. But oddly, it went up just last week because my student loans were reported as $0 owed and closed. Which isn’t right… but I’ll give it another month to sort itself out, then bother to determine what’s going on. Also of interest, my report doesn’t yet reflect a foreclosure. Just that my mortgage is settled. Perhaps that’ll change when the 1099-C is filed? It also says I now have 100% on-time payments again, so that’s great. I guess closing the account/mortgage also effectively cancels your late payment history?

Either way, that’s all I’ve learned for now. I’m still planning another post when I’m really really done. Hope you’re all doing well!