1099-C Filing Plus Debtor’s Income Tax Payment on the Canceled Debt Equals Debt Cancellation

 

In Re: Lukaszka, U.S. Bankruptcy Court for the Northern District of Iowa, file 8/4/17.

Combination of 1099-C filing by creditor and debtors’ tax payment on the canceled debt renders mortgage debt cancelled.

 

Debtors and First Federal disputed the effect of a 1099-C “Cancelation of Debt” form that First Federal issued to Debtors in 2013. Debtors argued that the 1099-C shows that First Federal canceled their debt. Debtors seek confirmation of a Chapter 13 plan that orders First Federal to release the accompanying mortgage lien on their home. First Federal objected. First Federal argued that it did not file the 1099-C to cancel the debt but simply to comply with IRS regulations. First Federal also argued that, even if the 1099-C does cancel the debt as to Debtors, it does not cancel the in rem obligation of the property.

Debtors filed a Chapter 13 bankruptcy. Debtors asked the Bankruptcy Court to confirm a Chapter 13 plan that provided that First Federal’s debt was canceled in 2013 and to order First Federal to release its lien on Debtors’ property. Debtors argued that this language was appropriate because the 1099-C shows that their debt to First Federal secured by their home was canceled. Debtors argued that First Federal’s mortgage is bound to the underlying note. Debtors’ Chapter 13 plan requested an order that First Federal release its lien on their home.

First Federal objected to its treatment under the Chapter 13 plan. First Federal argued that Debtors’ plan improperly modified their rights as a holder of a claim secured by a principle residence in violation of § 1322(b)(2). First Federal argued that the 1099- C does not cancel the debt or prove that it canceled the debt. First Federal argued that it stopped collection activity and issued the 1099-C simply to comply with IRS regulations. First Federal argued that the 1099-C form alone is not sufficient to prove that it canceled the debt.

First Federal further argued that, even if it canceled the debt, that cancellation was only effective with respect to Debtors’ personal obligation—not the mortgage. First Federal argued that the in rem obligation of the home itself remains. First Federal concludes that it has a $59,667.34 claim secured by Debtors’ primary residence that Debtors’ Chapter 13 plan cannot alter.

The court held that in the absence of any evidence indicating that First Federal did not intend to cancel the debt, the combined evidence of the 1099-C form and the debtors’ tax payment was sufficient evidence that the debt was cancelled. The court stated that it would be inequitable to find otherwise.

http://www.ncbrc.org/wp-content/uploads/Lukaszka-Bankr.-ND-Ia-Aug-2017.pdf

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