Canceled Debt Confusion

**fallacy** · 03-30-2009, 10:25 PM

Here is a recap of my info:
-Purchased in 2006 using 80/20 loan for $175k
-Refinanced later in 2006 ($170k 1st and $45k 2nd)
-Located in Arizona under 2.5 acres, my primary residence, etc.

Since I refinanced my home in 2006, am I no longer protected by the Debt Forgiveness Act if I receive a 1099-A? I've asked two different CPA's; one said I was protected, and the other said I was not protected.

Any thoughts?

**AZChick** · 03-31-2009, 06:56 AM

I think the issue will be that you took money out during the refinance. From what I understand the money that was used to refinance the house will be okay, the additional money that was taken out will be an issue. I'm thinking the 2nd 45K will be a problem since it was not used to pay off the previous loan on the house???? What do you all think?

**KT in CA** · 03-31-2009, 07:50 AM

I agree. If you refi and take cash out then you are not covered under the MFDRA. And I think AZChick is correct in that the original amount of the loan is covered but any cash taken out isn't. But if you can prove that you used any or all of that money for home improvements (like a kitchen or bath remodel) then I believe it is exempt as well. You might want to consult a tax attorney on this one. I think a lot of CPA's are going to be schooled this tax year on what and what isn't covered under the MFDRA.

**fallacy** · 03-31-2009, 10:18 AM

Let's say the scenario is: I am in the middle of foreclosing, and the lender sells my 2nd to a collection agency. The 1st ends up foreclosing, and I am working with the collection agency to repay the 2nd either through a settlement or monthly payments.

In this case, I would only get a 1099 for the 1st, and that would be covered by the Debt Forgiveness Act?

**KT in CA** · 03-31-2009, 10:48 AM

It may be covered up to the amount of your original loan.

When the waters are that murky, it's best to consult a professional.

**fallacy** · 03-31-2009, 11:26 AM

That is what I was thinking.....

If I ended up settling my 2nd, I could claim insolvency and not be liable for the taxes on that as well. I have no retirement fund, no investments, and only $2k in savings. On the other hand, I have $30k in unsecured credit debt used to get by each month and two auto payments.