The following is a summary of a Foreclosure Defense “white paper” currently being presented by Amstar Litigation all over the country as part of an effort to improve the quality and the quantity of legal representation that is available to US homeowners that are in financial distress.

Forgiveness of Indebtedness Income

A. Typical loan modification or other “workout” results in the lender receiving something less than 100% of the principal on its loan

B. “Knee jerk” lender reaction is to issue IRS Form 1099 to the borrower (with copy to the IRS) reporting ordinary income to the borrower in the amount of principal reduction, and often the total amount of other fees and charges forgone (e.g., interest) for the entire life of the loan

C. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately)

D. For otherwise seemingly taxable transactions, there remain at least three viable arguments to resist the issuance of a Form 1099—

1. The transaction constitutes the settlement of a disputed liability, not cancellation of indebtedness

2. The transaction represents a non-taxable reduction of the purchase price

3. The borrower is insolvent

E. If the lender agrees not to issue Form 1099, the issue is largely over

F. If, however, the lender persists, you can argue that its failure to report to the IRS will only subject the lender to a $100 statutory penalty, whereas filing the report will subject the borrower to a substantial tax liability

G. Even with the filing of a Form 1099, the borrower can still exclude the reported amount from income if the borrower is insolvent or files for bankruptcy