How can you pay thousands of dollars in mortgage payments in a year, and get a  tax Form 1098 for a fraction of actual mortgage interest paid?

That’s what my client wanted to know.

His monthly mortgage payment is $2715.  The loan is currently interest only.  All the payments were made.

And yet, the Form 1098 from PNC says the year’s mortgage interest paid is only $1800.

So what happened to the other $30,780?  That’s a lot of money to go missing.

Welcome to the further screwed up world of mortgage loan servicing.

The short answer right now to the question I posed at the top is I don’t know yet.

But here’s what I suspect. [Read more…]

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.

My house is my retirement plan.

If I had a dollar for every time a client said that, I could retire today.

But that approach to funding your old age only works if….

Sell your house to retire

The value in your house makes your balance sheet strong, but doesn’t put food on the table or gas in the car.

That home equity is illiquid.  You can’t write a check against it for the other necessities of life.

To get at that equity, you need to sell the house, or  borrow against it.

A traditional loan requires that you have cash to cover the monthly loan payments.  But hey, you’re not working.  Where does that money come from?

Reverse mortgage

The reverse mortgage was invented to allow seniors who can’t make monthly payments on a conventional loan to access the equity in their home.

But the fact that a reverse mortgage has no monthly payments does not mean that it’s cost free. [Read more…]

 

At the end of your Chapter 13 case, you don’t have to wonder where you stand with your mortgage lender.

• Are you really, fully current with the mortgage?
• Are there fees and charges that you don’t know about?
• Are you ready to emerge from bankruptcy 100% paid up?
• Is the lender really poised to start foreclosure?

Starting December 1, 2016, your Chapter 13 trustee is required to flush out any surprises that lurk in your home loan servicer’s accounts.

And a federal judge stands by to sort it out.

When my client’s case was through,  the rule resulted in her being $62,000 better off than she would have been otherwise.

Let’s hear it for Bankruptcy Rule 3002.1.

Why we needed this rule

Rule 3002.1 addresses the lack of transparency that used to exist about your home loan during a Chapter 13. [Read more…]