January is the time of year when 1099 forms start to be distributed. Most people associate this tax form with independent contract income. However, 1099-A and 1099-C forms are used post-mortgage foreclosure in circumstances where the house sold for less than the balance owed on the loan (i.e., there was a deficiency) and the mortgage company has stopped collection on the outstanding balance.
Receiving a 1099-A form will NOT cause you to owe income taxes on the mortgage deficiency balance. 1099-A (Abandonment of Property) is the appropriate form to receive if either the account at issue was subject to a bankruptcy discharge or the account at issue was a principal residence AND the mortgage company voluntarily forgave the debt (per the Mortgage Forgiveness Debt Relief Act).
Receiving a 1099-C form (Cancellation of Debt) DOES create a taxable event. This form is commonly used by collection agencies if a debt is settled for less than 100% owed. Basically, the forgiven debt is treated like a gift to you that has value similar to wage income, and you must pay income tax on this amount. Recently, with the housing market crisis and foreclosure sale prices being very low, more and more mortgage deficiencies lead to 1099-C forms being filed by lenders. Under current law as of 2012, a mortgage company may not file a 1099-C form as to a borrower post-foreclosure if the homeowner has discharged the contractual liability in bankruptcy or if the debt was secured against a principal residence and voluntarily forgiven by the mortgage company.
When in doubt, consult with a licensed attorney or CPA in your area. Our office specializes in mortgage foreclosure and consumer bankruptcy. We have successfully represented hundreds of homeowners in the Michigan and federal courts.