Protect Your Home from Unlawful Collections


By Joe Vera

Joe Vera.

A 1099-C is sent by a creditor to inform you and IRS that it is going to write off the remaining unpaid portion of your noncollectable debt. A debt that is partially or completely discharged from taxes becomes income to the debtor and is noncollectable by the entity discharging the debt or any holder to whom the obligation has been sold or assigned unless costly and specific actions are taken.

Do you know if your lender issued or will issue you a 1099c for cancellation of debt?

In 2012, a home owner wanted to apply for a modification on his first mortgage. He had filed bankruptcy in 2006. The deed of trust recorded as a lien securing a second mortgage of $120,000 had not been removed. Consensual liens such as mortgages cannot be removed unless they are paid. The home owner offered the second mortgage lender $5,000 to remove the lien. The lender refused.

The first recommended action for the home owner was to send a qualified written request (QWR) in order to discover who the actual mortgage holder was (see for information on QWRs). The actual lender was called when the response to the QWR arrived. They admitted the bankruptcy eliminated the debtor’s personal liability. The lender correctly stated they could foreclose and take the collateral property. But, the property value had dropped to less than the first mortgage in 2012. The lender knew the home owner was trapped and insisted they would not consider accepting less than $60,000.

During one of the conversations, the lender stated that the debt had been discharged and that IRS had been notified. Although advancing what could be an illegal collection, the lender assigned the debt to a collection agency. The collection agency contacted the home owner in order to collect.

The next recommended action was for the home owner to advise the collection agency in writing that the actual lender had determined the obligation was noncollectable due to following:

  1. A bankruptcy had removed personal liability
  2. The collateral (property) value was less than the first mortgage
  3. A 1099C had been issued

Creditors receive a tax benefit for canceled debt reported to IRS. This does not mean the debt is canceled. The creditor can try to collect the debt but may have to reverse the write off on their taxes. The likelihood of a creditor going through the expense in order to reverse their income tax filings appears highly unlikely.

One month after writing to the collection agency, the home owner received a letter from the actual lender. “We are cancelling the remaining amount owed to [the lender]. … This means nothing more is owed on the loan….” The lender also wrote that they would release the lien and record the release with the county recorder in the county of the home owner’s property. The letter provided a name and telephone number for the responsible officer employed by the lender.

We want to hear from you if you are a home owner facing difficulties with your real estate. Joe Vera has been a real estate consultant, broker, author, and lecturer on distressed real estate situations under severe time constraints for thirty-six years. He will personally answer your questions and speak with you about your real estate as time permits. He can be reached at (424) 645-7744 or through

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