Cooperative Short Sale after Chapter 7 Discharge

Asked by artie, Pleasanton, CA Sun Dec 9, 2012

I surrendered my primary residence in a Chapter 7 bankruptcy that has been discharged. Lender contacted me offering relocation assistance in exchange for participating in their "Cooperative Short Sale" program. They have now approved a short-sale, but the document contains the following text:

The amount of the deficiency will be reported to the Internal Revenue Service (IRS) on the appropriate 1099 Form or Forms.

But according to my BK lawyer, I am free of the mortgage debt, so why would there be a "deficiency" reported, and does cooperating potentially create deficiency/tax exposure?

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John Juarez, Agent, Fremont, CA
Sun Dec 9, 2012

Keep in mind that you are talking about two different events. They are linked but they are separate.

One is the reporting of the forgiveness of debt done to the IRS by your lender.

The second event is the possible liability for the payment of income tax on the forgiven debt. You may or may not be liable for payment of any taxes on this forgiven debt. Your bankruptcy attorney or qualified tax professional is the person to whom you should direct your questions.
0 votes
Steven Ornel…, Agent, Fremont, CA
Sun Dec 9, 2012
Hi Artie,

As Taj and Steve recommend, you need to get a solid answer from your BK7 Lawyer as we don't practice law nor are aware of any material facts not being shared.

This said, in general, it is a fact Mortgage Forgiveness Debt Relief Act of 2007, Bankruptcy and/or Insolvency can reduce or eliminate your tax liability. Since lawyers charge for their time you might want to review the following links to come up with some specific questions for your Lawyer:

The Federal Mortgage Forgiveness Debt Relief Act of 2007:…

Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
-Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
-Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
-Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
[End Quote]

CA's Mortgage Forgiveness Debt Relief conformity:…

Chapter 7 Individual Bankruptcy:,_Title_11,_United_Sta…

Best, Steve
0 votes
Steve Mohseni, Agent, Pleasanton, CA
Sun Dec 9, 2012
The bank will issue a 1099C to offset their loss on their balance sheet that they report however according to the Mortgage Forgiveness Debt Relief Act (which is set to expire end of this year and extension may be granted) you may not owe any taxes.....the fact that you are in BK, you may be excluded for any taxes Taj mentioned on the previous response, these are tax and legal questions and answers to them can be different based on your specific situation. You should really seek advice from the appropriate sources.

I have closed two Bank of America Cooperative Short Sale transactions within last two months and closely work with a tax attorney. I would be happy to work with you closely and get you a proper response offline.

Best wishes and Happy Holidays!

Below, please find the link to IRS page:…
0 votes
Taj Weldon, Agent, Tracy, CA
Sun Dec 9, 2012
Ask your bk attorney , you won't find legal advisors on here.
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