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Oct 2012After Bankruptcy: Why did Bank of America Forgive My Second Mortgage?
Posted by Robert Weed / in After Bankruptcy, General Information About Bankruptcy Law / 16 comments
Lots of people, in current or recent bankruptcy, are getting letters from Bank of America forgiving their second mortgages.
What’s going on?
Here’s the story. Bank of America, during the financial crisis, lent a lot of money to Countrywide, the giant mortgage lender. When it looked like Countrywide would collapse anyway, Bank of America took over the whole company.
Now, because Countrywide pulled some shady tricks during the mortgage boom, Bank of America has to settle up for Countrywide’s shenanigans. Specifically, Bank of America has agreed to forgive $10 billion in mortgage loans.
After bankruptcy, homeowners celebrate Bank of America forgiving second mortgages.
Obviously Bank of America doesn’t want to forgive the loans of people who are paying them–they are a bank after all–they lend money at interest hoping to get more back. So they are mostly forgiving loans that people are not paying and loans that people have already filed bankruptcy on.
Is that any help? Well, some.
Many of my clients filed Chapter 7 bankruptcy, stayed in the house and just stopped paying the second mortgage. That’s my “nerves of steel” strategy. Those people planned to stay in the house for several more years–knowing they might never have any equity because the second mortgage was still there, just getting further behind. They were happy just to stay in the house. Now, with the second mortgage forgiven, those folks can hope to have equity–maybe soon.
Some people file Chapter 13 bankruptcy in order to remove the second mortgage from their house. Those people wanted to know that when the chapter 13 plan was completed, the second mortgage would be gone–they wanted to be sure they’d have equity some day. Now the second mortgage is gone instantly. What should they do? See if there’s an early exit from Chapter 13. Is it possible to convert to chapter 7? There may be income eligibility issues that need to be looked at closely. Maybe drop out of bankruptcy altogether–if the credit cards and other debts aren’t much.
Do people have to pay debt forgiveness taxes when these second mortgages are forgiven?
Not if you filed bankruptcy. There no debt forgiveness tax on debts wiped out by bankruptcy.
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Since 1993, the Bankruptcy Law Office of Robert Weed has helped twelve thousand people file bankruptcy in Northern Virginia. Robert Weed is a frequent panelist and speaker at the meetings of the National Association of Consumer Bankruptcy Attorneys. He is one of Northern Virginia’s most experienced personal bankruptcy lawyers. As an expert on changing consumer bankruptcy laws, RobertWeed has been interviewed on local and national TV and quoted in newspapers across the country.
Robert Weed
For more on the Countrywide shenanigans, check this article from the New York Times. http://dealbook.nytimes.com/2012/10/24/federal-prosecutors-sue-bank-of-america-over-mortgage-program/
Countrywide was really running two separate rackets. They tricked consumers into taking loans that there was no way they could afford. (That’s why they now have to pay back that $10 billion.)
And they turned around a claimed those were strong, safe loans, and sold them on to Freddie Mac and Fannie Mae, who then had to be bailed out by the taxpayers. (That’s what they are being prosecuted for now.)
Notice that the American people picked up the tab, eventually, on both ends.
Bill Idiot
What about people with with first mortgages from country widw that were also taken over by bank of america. My poor father 89 years old has one that take his whole monthly ss check for the monthly payment
Robert Weed
Bill:
It would be nice if they forgive loans based on what people needed it. But they mostly forgive loans they know are never going to get paid anyway.
Here’s an article from the New York Times that explains they were supposed to “modify” loans to keep people in their homes. But they mostly forgive seconds that aren’t being paid anyway. So they really aren’t giving up anything. http://www.nytimes.com/2013/02/18/opinion/the-second-mortgage-shell-game.html?pagewanted=all&_r=0
steve
Robert, are you seeing Chase canceling/forgiving 2nd TD for similar reasons? (Washington Mutual old loans)
Robert Weed
Steve:
Less. Bank of America agreed to specific targets as part of the settlement.
PS One of my clients just emailed me today that Chase had forgiven his second mortgage.
Robert Weed
I should add that I have started to see several of these from Chase, too.
Ulysses Gladden
Mr. Weed I am in the state of Ga. and currently in bankruptcy. B.O.A. just recently forgave our 2nd. mortgage . However our bankruptcy is still in progress(ch. 13) Are we not protected from this cash out by the bank while we are still under B.R. Protection? One of the benefit of 13 was the dropping of the 2nd. mortgage. Are we now liable for the tax on the amount dropped by the bank? This is not something that our lawyer discussed with us.
Robert Weed
Ulysses:
Taxes should not be a problem. For mortgages on your home, Congress extended the tax holiday on mortgage debt forgiveness through the end of 2013. “Talk to your tax adviser.”
You may want to talk to your lawyer about possibly dropping out of chapter 13. MAYBE you could switch to Chapter 7, or just get out of bankruptcy, now that the second mortgage is gone. (A lot of different factors would go into that decision, but you should ask.)
siska aprilia
Mr. Weed, my second mortgage just now got a hold of me 3 years after my house foreclosed and demanding a pay off of $53,000. I had thought the first and second mortgage worked it out at the foreclosure, so each can get a percentage, even if both wont be paid in full. I also learned about a mortgage loan assistance program and a 1099-C that can be issued for those who is not able to pay off their mortgage debt in full, but my mortgage company does not seem to be aware of that? What is the best way?
Robert Weed
Siska:
Don’t know what state you are in, but in Virginia the second mortgages almost always come after people after a foreclosure and you need to pay them, offer a substantial settlement, or file bankruptcy. You need to talk to a bankruptcy lawyer in your state.
Lynn A
I completed my Chapter 13 and Bank of America was my 2nd mortgage holder and was lien stripped. This was filed and the lien released from my property. After this, I got a letter from BOA stating that they are going to forgive my Equity Line of Credit under a federal program and I won’t owe anything. This will be done unless they hear from me within 30 days. The letter was dated 9/19/12. My chapter 13 plan discharged 7/2012 and the paperwork was already taken to the registry of deeds and the lien BOA had was now off my property. I called BOA on 9/21/12 and spoke with April (I was told after she continued to argue about the validity of the lien on my property that I still did indeed owe them the money and that I could not speak with a supervisor as there were no supervisors) and she stated, fine, then my loan won’t be forgiven and now I will still owe it. My house, by the way, was sold and was being closed on one week from this conversation so this was pretty upsetting. I immediately sent a certified letter to them stating what had transpired and demanded they stop bothering people who had taken all the legal steps through bankruptcy (ch 13) and that they can’t forgive a debt that doesn’t exist anymore, and regardless it had been deemed entirely unsecured and they were paid within the terms of the payment plan. Now, I recieve a 1099-C with event code G which means they just stopped trying to collect on the mortgage. I called them (and I swear I spoke with the same nasty person who continued to tell me that just because I filed bankruptcy doesn’t mean I don’t still owe the money, they just can’t bother me for it anymore!!) and demanded a corrected 1099-C. It is my understanding that the event code should be A for bankruptcy at the very least but on top of that I can get no info on whether they can still market this as debt forgien and as a home equity loan since the courts deemed it an unsecured lien that was discharged and stripped prior to BOA stating they would “forgive” the loan. Needless to say, they have not corrected the 1099-C. Anyway advise on how to proceed would be great since I can’t file my taxes until I know what to do with this erroneous 1099-C.
Thanks
Robert Weed
Lynn:
Bank of American is plain stupid–they are so big they don’t know what they are doing.
But you don’t need to upset yourself trying to talk sense to them–it doesn’t do anything.
I explain what to do about after bankruptcy 1099c’s here. http://robertweed.com/blog/general-bankruptcy-law/bankruptcy-foreclosure-1099-a-and-1099-c/
Danielle
Have you seen any from Suntrust? My 2nd is through them and is supposed to be stripped in my bankruptcy, this outstanding item is the only item stopping me from requesting an early exit from the bankruptcy.
Robert Weed
Danielle:
I’d be real surprised to see SunTrust do anything like that. Bank of America is doing so much of this because they, foolishly, bought out countrywide and now are stuck making nice because of all the bad things Countrywide did. SunTrust doesn’t have that incentive.
Janna
My loan was not with Countrywide, it was with Bank of America. When I spoke to representatives it was always with them and their name was on everything from the beginning. We, too, were given a loan that we couldn’t actually afford. The home itself should not have legally passed an inspection. We were still naive and had never purchased a home nor did we know what to look for or what we were really getting ourselves into by purchasing this particular home. We were told that the loan we had applied for was days from being “no longer available” as they were discontinuing it, so out of fear that we would not be able to buy a home, we purchased the first home we found. We felt pressured. We are currently three and a half years off of discharge and have been working very hard to rebuild our credit. We had to dispute BoA on our credit reports as they never reported our bankruptcy. Yes, our credit reports showed, up until last month, that we were 3 years behind on our mortgage!! They have forgiven the second mortgage at this point (it, too, was discharged in the Chapter 7 when we surrendered the home.), but that is not currently my problem with them. Since filing our bankruptcy, my husband finished his bachelor’s degree and took a job out of state. BoA has managed to track us down with every move we have made, but have yet to go through the process of taking our name off of the deed/title to the home. Being that we are in a much better financial situation that is only getting better for us now, we have begun looking into where we need to be in order to try our hand again at purchasing a home. Here is where my issue comes in: Even though we did everything we were supposed to do and took all of the expert advise to rebuild our credit, WE STILL CAN’T GET A LOAN!!! Bank of America has not changed title, and to get a loan, you must be off title for two years. So I am at a loss for what to do now. I cannot convince BoA to speed up the process or to back-date the change of possession. So, it looks as though our moving forward hinges entirely on them!
Robert Weed
Janna:
Right. That’s why I tell people, Don’t Move Out–and if you have to move, Rent It. At least you have some money coming in since they are blocking you from being able to buy again. There’s no remedy that I know of.