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.

Years of uncertainty and indifference, rooted in the automatic stay and a homeowner’s ongoing obligation on their mortgage after bankruptcy, has ended with a new rule.

Mortgage servicers must now send monthly statements to borrowers in bankruptcy under a new CFPB rule effective April, 2018.   

The earlier version of the rule, adopted in 2014, allowed servicers to send no statements to consumers who had discharged their personal liability in bankruptcy or who had a pending bankruptcy case.

Now the rule creates a duty to render a monthly statement unless

• the consumer requests the servicer stop sending statements
• the consumer’s Chapter 13 plan provides for surrender, avoidance of the lien, or doesn’t provide for ongoing payments
• a court order avoids the mortgage lien
• a Chapter 7 statement of intentions indicates surrender AND no payment has been made since bankruptcy was filed

Even if an exemption to the duty applies, the consumer can opt in to receiving monthly statements by making a written request.  The request can be made by any borrower on the loan or by their agent, such as their bankruptcy attorney.

And just like RESPA Requests for Information, the servicer can designate an exclusive address to which the request must be made.

Statements tailored for Chapter 13

When a borrower is in Chapter 13, the servicer must modify the monthly statement to show the amount due as only the post petition amount.

The monthly statement must also account for the pre bankruptcy arrearages in a new category on the statement.  Required information on the arrears includes

• amount received on the prepetition arrearage since the last statement
• the total of all payments received since the bankruptcy was filed
• the current balance of the prepetition arrearage

Boon to borrowers

This rule is a huge step forward for borrowers in bankruptcy.  Until this rule, there was a terrible disconnect between the borrower’s intention to continue paying on the mortgage and the servicer’s ability to avoid providing information about what is due.

FRBP 3002.1 spoke to part of the problem when it required servicers to file and serve notices of changes.  But that still left the homeowner without the monthly cue on where and how much to pay on the home loan. 

The new rule goes a step further in that it requires the monthly statement to show both the state of the loan payments since bankruptcy, but also the progress toward curing any pre bankruptcy default.

Challenge to servicers

For the last 25 years of my bankruptcy practice, servicers have routinely botched the problem of accounting for payments made on mortgage loans in Chapter 13.  They have struggled to impliment a system that properly credits and accounts for payments received after filing on the continuing mortgage along side payments received on the pre bankruptcy arrears.

Even before this rule, servicers can seldom file papers with the bankruptcy court with numbers that are consistent as to the amount the debtor owes.  I’ve seen cases where a proof of claim, an objection to confirmation, and a motion for relief from stay from a lender each states a different number.

The chances for the servicer to screw up have just increased with the implementation of this rule.

I recognize that Chapter 13 presents a challenge, but servicers are in the business of accounting for money.  They need to get it right.  And if compliance makes their job more expensive, they can negotiate an increase in price for their services.

It can no longer be OK to keep borrowers who want to pay in the dark.

Thank you, CFPB.

More for borrowers

The new, improved Request for Information

Decoding your mortgage statement

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…]

Just when I thought that most of the pain from the mortgage lending bubble of a decade ago was behind us, we arrive at a painful milestone.

Those 10 years-interest only loans from 2006 and 2007 are resetting.

Instead of being interest only, they now move to principal and interest.  And the balance originally borrowed for 30 years, has to be repaid in the remaining 20 years of the loan.

Ouch.

Yet, many homeowners I’ve talked to are only vaguely aware that the earth under them is about to shift.  Or have only a vague plan about what to do now that it has shifted.

How amortization works

Amortization is the mathematical formula that tells you how much you have to pay each month, at a given interest rate, in order to pay off a loan over a given number of years.

The standard home loan in the US is a 30 year loan.  The fixed monthly payment is calculated so that by the end of thirty years, you have repaid the amount borrowed and the interest that the loan accrued over those three decades.  In the early years, most of the payment goes to interest.  As the principal is reduced, interest is a smaller share of each payment.

Suppose you borrow $300,000 at 5% , amortized over 30 years.  The monthly payment is $1610. In the first month, $350 goes to pay off principal, and $1250 goes to interest.

By the last payment, the principal is fully repaid.

But let’s look at the same 30 year loan, assuming it was interest only for 10 years, and the entire loan is repaid in the remaining 20 years of the loan term.

In year 11, the payment moves to $1980 per month.  The first payment in the amortization period is $780 is principal and $1250 is interest.

Coping with mortgage reset

In the best of all possible worlds, you saw the reset coming and have the increased cash flow available to make the larger payments of principal and interest payment.  Good work.

But if the increased payment finds you still budget challenged, you’ve got a problem.

Your choices include refinancing the loan, replacing the existing loan with a new loan, with a life longer than the 20 years remaining on your current loan.

Modification of the loan with the current lender may be an option, though you usually have to show some evidence of hardship to qualify for modification.  The government-regulated loan modification programs have expired.

You can use this juncture to consider selling the home, if it’s time to relocate, downsize, or escape the work involved with home ownership.

Lastly, you can look at your options to eliminate other expenses from your budget to free up cash, or other ways to increase your income with a second job or getting a housemate.

Don’t forget that  Housing and Urban Development offers expert housing counselors, free of charge.

Figuring out what you owe on your home loan can be harder than a calculus exam.

For most people, their mortgage is their biggest debt.  And their home is their most important asset.

Yet, the people accounting for your payments are increasingly incapable of the very basics of their job.

Things have changed since the local bank made you a loan to buy a house and collected the payments you made on that loan.

Now, home loans get sold to someone else the moment the deal closes.  The right to collect the loan payments is bought and sold separately from the right to the payment amount.

And increasingly, the servicers make mistakes as they cut  corners to make a buck.

What do you need to know to assess whether your loan servicer has got the numbers right?

1.  Principal balance isn’t what you owe

Ask someone what they owe on their mortgage and they’ll recite the principal balance.  The principal balance is the remaining part of the amount originally borrowed that is still unpaid.

Yet you may well owe additional sums:  delinquent payments that are mostly interest;  late fees;  escrow advances; or the junk fees that most delinquent loans are larded with.

Finding the principal balance gets trickier yet if the loan has been modified to include a non-interest bearing amount or some other, non standard adjustment.

So the amount necessary to pay off the loan upon sale, or refinance, may well include charges from the past plus fees for calculating what you need to pay to satisfy the debt.

2.  Payments are credited to oldest month unpaid

If you fall behind on a home loan, then resume making payments, your payment is credited to the oldest month still unpaid.

So the payment you make in June may be credited to February.

And the servicer will report that you remain due for June, even though you sent a check in June.  It’s all in the rules about how payments are credited under the terms of the note.

3.  Payments may not be credited

Loan servicers seem to have a separate “pocket” labeled “Suspense”  into which they sometimes dump your payment. They’ve got your money, they just haven’t credited it to the amount you owe.

The only reason for putting funds in suspense that seems justified is when the payment is too little to make a full payment on the loan.  Servicers don’t have to credit partial payments.

So, they put the money in suspense until they receive enough money to make the regular payment.

For reasons no servicer has ever adequately explained, I’ve seen suspense accounts in the tens or even a hundred thousand dollars.

So, a mortgage statement that doesn’t address any funds held in suspense doesn’t tell the whole story.

4.  Escrow accounts contain something extra

If your property taxes and hazard insurance are paid by the lender, you have an escrow account.

Under federal law, the lender is allowed to collect more than the sum of the year’s taxes and insurance as protection against the borrower’s non payment.

The extra money, the “cushion”, can be no more than 1/6 th of the annual expenditures.  It remains your money, it’s just held by the servicer should it have to pay when you haven’t paid.

You should get an annual escrow analysis that shows income and expenses in the past year’s escrow account and a projection of the coming year’s expenses.

That projection will determine what you pay in escrow payments going forward.

5.  Statement doesn’t come from owner of note

Ever since loans were bundled up and sold on Wall Street to investment trusts, the work of collecting your payments has been handed off to loan “servicers”.

The owner of the note pays a company to deposit your payments, keep track of fees and expenses, and take action if you don’t pay.

The servicer seldom owns the note, they just own the right to collect the money.

And servicers change.  Sometimes as often as we change the oil in our car.

When there’s a loan handoff from one servicer to a new servicer, details about anything unusual in the loan account sometimes get lost.

Get behind the monthly statement

The problem of finding out what the servicer thinks you owe became such a problem that regulations written pursuant to the Dodd-Frank act gave borrowers some clout.

Now, a borrower with a home loan can make a Request For Information about their loan and expect answers within a shorter period than under the old law.

If the servicing of the loan has changed hands, the borrower has a window in which to request information from the old servicer, to compare with what the new servicer thinks.

Find the “how-to” for a Request for Information.

More

Your mortgage and your credit report after Chapter 13

Bad mortgage accounting violates your Chapter 13 discharge

Get tax credit for curing mortgage defaults in Chapter 13

How Chapter 13 works

Half a loaf is what you too often got when you weren’t the original borrower on a home loan.

Whether you inherited the property or it was awarded to you in a divorce, you get shortchanged by the mortgage lender.

Even with  a court order from a divorce or a deed from the probate court making you the owner of the property, too often the bank holding the mortgage loan didn’t accord you the full set of rights they had to give the original borrower.

While the law says you own the property, the mortgage lender says “so what?”

But that just changed.

Starting in April, 2018, CFPB amendments to RESPA and TILA  rules extend mortgage servicing protections to successors in interest in real estate.  Those who inherit property, or are awarded a home in divorce, now have the same federal rights with respect to the home loan as the original borrower.

‘Bout time.

Now, if you are a successor in interest on a home, you are now entitled to make a Request for Information about the loan; dispute the lender’s accounting; and participate in loan modifications, just as if you’d been the original borrower.

Who are successors?

In a stroke of efficiency, the new CFPB rules adopted the list of protected successors from 20 year old federal law.

The Garn-St.Germain Act created a list of transfers of real property that are excepted from enforcement of a contractual “due on sale” clause.  Transfers that don’t fall in the list of exceptions can trigger a foreclosure since the note is now due in full.

The protected transfers include

Getting confirmed as a successor

Under the new rule, the definition of a “borrower” is expanded to include a confirmed successor in interest.

When a successor makes a written request of a mortgage servicer that indicates that the person making the request may be a successor, and provides enough information to allow the servicer to identify the original borrower and the loan in question,  the servicer has duties to the requestor.

Within specified time frames, the servicer must indicate what documents are needed to confirm that the person making the request is a protected successor.  The document request must reasonable under the laws of the jurisdiction, the situation of the successor, and the documents already in the servicer’s possession.

Borrowers have rights

As a confirmed successor in interest, all of the RESPA and TILA protections are available to you.

It does not matter for these purposes that you aren’t liable on the underlying loan.  Your property is liable, and thus you can invoke your rights to get information, challenge errors, have payments properly credited, and be considered for loss mitigation.

More

New rules/better information for borrowers in bankruptcy

More about the new Request for Information

California’s better way to pass real estate at death