People have their own views about foreclosure. For most it is nothing less than a disaster to lose their own home. But for a few others it is just a narrow escape and they again start to look for a new, cheaper home elsewhere.
Apart from how you react to foreclosure, you should also be aware of the consequences this foreclosure has on your tax obligations. When a homeowner loses his property due to foreclosure, the mortgage lenders try to sell off the property to pay off the loans. But many times the money is not enough to cover up the mortgage. In such case the bank will have to sell your home at a loss. This transaction technically means that original homeowner has still not paid the full due amount and there is a residual balance he owes to the bank. This is also possible in case of other types of loans and unpaid credit card dues as well.
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Now as the bank is not able to recover the total loan amount, they may write off the balance as a loss. This is how they cancel the balance debt. This is where the lending institution issues the debtor Form 1099-C, Cancellation of Debt. To issue this form the bank may not even have the changed address of the homeowner! Many a times he is unaware of the fact that the bank has issued form 1099-C to him. He proceeds to file his return without this form. He is made aware only when he receives a deficiency notice for paying inadequate taxes or when the IRS audit is initiated.
At the point when the homeowner's residual debts are canceled and he receives 1099-C, the forgiven debt is to be updated as his income while filing his tax returns or else this treated as a discrepancy by the IRS and the taxpayer is bound to be penalized. As only the taxpayer is solely responsible for the complete submission of his income details to the IRS, he cannot be saved on excuses as non-receipt or ignorance of 1099-C.
Things happen in similar way on a bankruptcy application. One may think filing bankruptcy can give him another chance to make a new beginning but for this you should consult a licensed attorney. He should find out from you the forgiven debt amount in addition to all other details so that he can update the same as your income and is excluded from the bankruptcy application. If you are near to a possible foreclosure or are considering the option of bankruptcy, you must consult a lawyer who can take care of these intricacies to help you protect your interests.
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