After discharge, lenders continue to make mortgage mistakes
During the recession and its accompanying mortgage crisis, it was discovered that many of the major lending institutions had treated their borrowers unfairly. Last winter, five of the largest banks in the United States paid $25 billion to settle state and federal claims over improper mortgage practices.
As part of that settlement, the banks agreed to help out struggling borrowers. In exchange, the government said it would give the banks credits towards forgiven mortgage debt.
Unfortunately, though, it appears that the bank errors have not stopped. According to a recent story in The New York Times, some banks have been “forgiving” mortgage loans that were already discharged in bankruptcy.
In one case, a woman in Connecticut received a letter from Chase Bank informing her that the bank was forgiving the principal on her $64,000 loan. That would have been great news, except for the fact that her loan had already been discharged in bankruptcy three years earlier. In another case, Bank of America “forgave” a home equity loan in excess of $230,000 — more than six months after it was fully discharged in bankruptcy.
At this point, it is still unclear how many mortgage borrowers have gotten these letters by mistake. However, a spokesperson for Bank of America told The New York Times that the lender had sent out letters to 12,000 borrowers, though not all of them were sent erroneously.
The letters are more than just a mere annoyance for borrowers, many of whom worked tirelessly — albeit unsuccessfully — to reach alternative solutions with their lenders before filing for bankruptcy. Unlike debt discharged in bankruptcy, forgiven debt qualifies as “income” as far as the Internal Revenue Service is concerned. Since the banks’ letters specifically stated that the “forgiven” debt would be reported to the IRS, borrowers may find themselves on the hook for taxes they do not actually owe.
Working with a bankruptcy attorney
The issue highlights the importance of working with an experienced attorney whenever there is an issue surrounding the discharge or forgiveness of mortgage debt. The attorney can help to hold the lender accountable, ensuring that it treats the borrower fairly and follows state and federal law. In addition, the attorney can help the borrower make sure they are complying with state and federal tax laws.
Borrowers would also be wise to consult with a bankruptcy attorney as soon as they start having trouble keeping up with their mortgage payments. The attorney will be able to evaluate the borrower’s situation and help them with possible solutions, including stripping a second mortgage or pursuing loan modifications or short sales.