Is your Chapter 13 plan  paying back mortgage payments that were delinquent when you filed bankruptcy?

If so, a tax deduction lurks, unclaimed, in the trustee’s records.

Track down that tax deduction and you reduce your federal income tax burden.

But it’s difficult because, for reasons I have not been able to figure out, the lenders don’t send IRS form 1098’s to either you or the trustee for mortgage interest paid through the plan.

So you don’t have proof that mortgage interest was paid, and neither does the IRS.

But, we can fix that.  I recently had occasion to walk a client through the process of figuring out the mortgage interest paid by the trustee.

I’ll retrace my steps and you can see how I figured out that he’d paid some $50,000 in mortgage interest  over the years of his plan that he hadn’t yet claimed on his taxes.

1.  Find the interest element in the lender’s proof of claim.

To be paid through a Chapter 13 plan, the lender must file a proof of claim on official form B410.  The mortgage attachment to that form, B410A has a line in Part 2 for “interest due”.

That line shows us what part of the missed payments, as of the filing of the bankruptcy case, was made up of mortgage interest.

2.  Calculate what percentage of the arrears is mortgage interest.

Part 3 of the mortgage attachment form breaks out the elements in the lender’s claim in the bankruptcy.  We need to know what fraction of the total claim the trustee will be paying is interest.

Take the “interest due” amount you located in Step 1 and divide it by the total at the foot of Part 3.

That’s the percentage of the total claim of the lender that’s interest.

3.  Access the Chapter 13 trustee’s site for payments to mortgage creditor

Chapter 13 trustees use different software to account for their operations.  You should have received information at the beginning of your case on accessing information about your payments and the trustee’s disbursements.

If you need help with the trustee’s web site, call the trustee’s office for help.

On the trustee’s site for your case, find the claim filed by the mortgage lender.  There should be a list of the date and amount of each payment made to the creditor on account of your mortgage arrears.

Total the payments for the last calendar year and multiple that total by the percentage of the claim that is interest, from Step 2 above.

Bingo! you have the number that represents what the trustee paid your creditor in mortgage interest for that calendar year.

Tax accounting rough and dirty

Your figure for mortgage interest paid in a year is an approximation.  By the end of the plan, the amount of interest paid will equal the amounts you’ve calculated this way.

The creditor may have applied it to your account differently.  Mortgage loan servicing is so erratic and inaccurate these days that it’s hard to tell.

If this calculation is off, it probably underestimates the amount of interest in the early payments from the trustee.  Most mortgages require the lender to apply payments first to interest, then to principal, then to expenses.  My experience is that they seldom follow the rules.

If anyone objects to your calculation, make them propose a better one.  Or make the recipient of the mortgage interest account for it in the usual way.

Save your work

Outside of bankruptcy, the lender would send you and the IRS a copy of their report on Form 1098 for mortgage interest you paid during the tax year.

We’ve done this sleuthing because they didn’t tell either the IRS or you what you paid in mortgage interest.

So, you may have to show the IRS how you got to a deduction that doesn’t appear in their records.

Print or save to pdf each of the documents you used to make your calculation.  You want to be able to support the deduction if challenged.

Another path to tax deduction

Alternatively, you could use the Request for Information process found in RESPA to ask the servicer of your loan how much interest you paid in a calendar year.

Servicers are required to provide answers about loan servicing within 30 business days of your request.  Requests must be in writing and contain identifying information.  More on how to make a Request for Information.

Amend earlier returns

Federal tax law allows you to amend tax returns for three years from filing.  There’s an IRS publication for amending returns.

You can calculate what you paid through the Chapter 13 plan for prior tax years and amend those returns to claim this deduction.

Gather your calculator and get on the trail of these illusive, but valuable, mortgage interest deductions.

The plight of workers going without pay because of the government shut down looms over our news.

If our incomes haven’t been affected, it’s easy to see this as someone else’s problem.

But are the rest of us really immune to the same financial straight?

Over and over again, we hear that most U.S. families couldn’t pay an unexpected $400 bill without borrowing money.

The current problem is a lot bigger than $400.

Effectively out of work, federal workers face weeks with nothing coming in, and too little set aside.  It’s notable now because there are so many families affected.

But ending up with no income isn’t unique to the governmental workforce.

To paraphrase the credit card ad, what’s in your savings account?

Image courtesy of DavityDave and Flickr under a CC license.

Readers of Bankruptcy Soapbox vote for their favorite bits of bankruptcy and money advice with their eyeballs.

I’ve tallied the eyeballs on the 48 posts written in 2018, and, cue the fanfare, present the top 10 most-read new posts for this year.

10  What really causes bankruptcy

The pundit’s proposition that irresponsibility was the cause of bankruptcy made me furious.  Four decades of bankruptcy practice suggests that the root causes of bankruptcy relief have much more to do with laudable human activities and unavoidable bad luck.  See if you agree.

9  Chapter 13 discharges HOA debts

Thirteen years after the miserably written bankruptcy reform act became law, the 9th Circuit Court of Appeals made one thing clear:  the discharge in a Chapter 13 case wipes out the debtor’s personal liability for HOA dues that arose after the filing of the case.

8  What the automatic stay doesn’t stop

Filing bankruptcy automatically makes the continuation of most collection actions unlawful.  That’s the power of bankruptcy.  But that power has its limits.  These five kinds of legal actions can proceed despite a bankruptcy filing.

7  Are you screwed if you omit a creditor from your bankruptcy

What happens if you accidentally leave a creditor out of the list of creditors filed in your bankruptcy case?  Having screwed up, can you recover?  We look at when you can fix the mistake and whether that fix really solves the problem.

6  True story of a family who settled their debt for 3 cents on the dollar

My client, with a fine income, a home, and a working spouse, escaped $370,000 in credit card debt for pennies.  The power of Chapter 13 is that you keep your assets and pay only what your income or your assets allow.  Protection while you pay and no tax when debt is discharged.  Sweet.

5  What is life REALLY like after bankruptcy?

Creditors and the debt-settlement companies want you to think that life as you know it ends if you seek relief in bankruptcy.  Tain’t so.  Here is a clear-eyed look at seven ways that your economic life changes after your discharge.  None are negative.

4   IRS caught double-dipping

The Affordable Care Act imposed a penalty for not having health insurance, collected by the IRS.  I caught the IRS trying to collect that penalty twice: once as a part of my client’s tax debt for the year, and again as a separate tax on the IRS proof of claim.  Challenged, the IRS reduced its demand.

3  New law gives heirs and divorced people equal mortgage rights

Homeowners who got title through inheritance or a divorce decree have historically been treated as outsiders by mortgage servicers.  If the present owner wasn’t also the sole borrower on the secured loan, mortgage modification and even monthly statements were denied.  No more under new federal law.

2  The Motley Fool offers truly foolish advice on filing bankruptcy

In which I go off on a national financial service focusing on all the wrong things when looking at bankruptcy as an option for financial woes.  The question of whether to file bankruptcy has no simple or universal answer, and is NOT, in my view, driven by its effect on your credit score.

1  CFPB rule gives all bankruptcy filers a right to monthly mortgage statements

Mortgage servicers can no longer hide behind bankruptcy law to justify withholding monthly mortgage statements to a borrower who wants to pay the home loan.  Federal law now requires monthly statements, and protects servicer from a claim that it violates the law by doing so.  Score one for homeowners!

Next time, I’ll assemble my personal favorites from this year’s batch of posts.

Have a happy and prosperous New Year.

The commentator who equated debt problems with irresponsibility nearly caused me to melt down, right in my office.

Irresponsibility, he said!

The idea that people who find themselves with bills they can’t pay got in that mess through flighty behavior  or self absorption is sooooo wrong.

Mindless spending is seldom the cause of bankruptcy in my experience.  Occasionally, yes;  routinely, no.

The need for bankruptcy is more often tied to

• Job loss
• Ill health
• Business failure
• Supporting multiple generations of family
• Divorce

Credit card balances  are usually tied to basic living expenses, recent studies show.

The gig economy hasn’t helped.  Without employee benefits and regular work hours, workers find themselves responsible for providing insurance, tax withholding and without sick days or retirement plans.  And gig earnings seldom cut it for very long in the Bay Area.

The real cause of bankruptcy

In fact, I see people in my bankruptcy office because they followed the time-honored advice we give to each other.

They bought a house.

They started a business.

They cared for their extended family.

They robbed Peter to pay Paul rather than renege on their debts.

And, at some point, it all caught up with them.

Often, the problem looks like a tax problem and it’s IRS collection action that brings them to bankruptcy.

But the more likely cause is the fact they reduced their tax withholding to create cash to meet other obligations.  Or they paid their employees with “net checks” and didn’t pay over the employee’s tax withholding in order to nurse the business along a bit more.

Or, they are supporting  both adult, underemployed children and aged parents.

Then there’s the curse of home ownership.  During the Great Recession, created by manic buying of homes made possible by toxic loans, I often advocated for letting the house go as being an impossible financial burden.

But 10 years later, with home prices recovered and then some, I’m starting to see the up side of struggling to keep a home.

Rents are increasing as fast as home prices:  let the house go and you’ll pay nearly as much in rent, get none of the tax advantages of home ownership, and have no protection against continuing increases in rent.

Renters are even more vulnerable than those with overly costly homes.

It’s complicated

It’s cliche, but it’s true.

Every story is a bit different, but from where I sit, too many of us are just plain lucky that our economic fragility hasn’t caught up with us.

More

Debt settlement is a fraud

The three times when bankruptcy is justified

Credit heals