Faulty Loan Forgiveness May Cause Trouble for Some Consumers
In February of 2012, five of the biggest banks in the U.S. - Ally Financial, Bank of America, Citibank, JPMorgan Chase and Wells Fargo - agreed to pay $25 billion to settle state and federal claims over questionable mortgage practices and foreclosure abuses. In order to encourage the banks to work with borrowers who were having trouble paying their debts, the federal government agreed to give the banks a credit against the restitution order for mortgage debt relief provided to homeowners.
Letters Cause Headaches for Borrowers
Recently, some lenders, including JP Morgan Chase and Bank of America, have begun to send letters to borrowers saying that the bank has forgiven the balance of their loans. While many borrowers would welcome such a letter, there is a significant problem: some borrowers have already discharged these same debts through bankruptcy and, therefore, no longer owe their banks.
At first glance, this may seem harmless, but these letters could create significant headaches for borrowers whose debts have already been discharged. In most cases, the Internal Revenue Service (IRS) regards forgiven debt as taxable income. Debt discharged in bankruptcy is not, however, taxable income. Unfortunately, the letters sent to borrowers so far make it clear that the banks have reported the wrongfully forgiven debt to the IRS. It appears that borrowers may now be responsible for explaining the banks' mistakes come tax time.
Even worse, in most of these cases, the banks are forgiving second mortgages or home equity lines of credit - even if they are forgiving debts properly, they are not offering any assistance with first mortgages, the terms of which are most often the cause of foreclosures.
Banks Offer Little Explanation
The banks claim that some letters were worded poorly. Instead of forgiving debt, they say, they are releasing liens held on borrower property after debts were discharged in bankruptcy. Releasing the liens provides an important benefit to homeowners, particularly those planning to sell their property.
But this explanation fails to address why some borrowers - even those who own property not subject to any bank lien - have received these letters. Furthermore, no one from the banks has addressed the simple point that it is improper to claim to release a debt that is not owed.
An additional concern is that the parties in charge of overseeing the settlement have not addressed the possibility that banks are receiving credits from the federal government improperly. Gretchen Morgenson, a reporter for the New York Times, recently asked Joseph A. Smith, Jr., a former banking regulator who is monitoring the banks' compliance with the terms of the February settlement, how he planned to evaluate bank claims of relief provided and credits earned. Though Smith claims that all transactions must adhere to existing guidelines, he admits that compliance will be achieved, "through review of the corporate records relating to such transactions." Ms. Morgenson's response to Mr. Smith was, "Good luck with that."
A Bankruptcy Attorney Can Help
Filing for bankruptcy is an option for those who do not have enough income to satisfy their debts, and attempts to reconcile debt repayment with creditors have been unsuccessful. More than anything else, bankruptcy provides petitioners a means of taking control of their financial situations.
If you are considering filing for bankruptcy, contact an experienced bankruptcy attorney. A knowledgeable bankruptcy lawyer can assess your case and advise you of your options. For more information, contact an attorney today.