Mortgage writedowns occurring, but how much?

We often hear that banks are writing down mortgage debts, but then the lenders themselves say ‘this isn’t happening’. For such a large rumour there is a surprising lack of evidence on either side of the argument, although we do see scant documentation indicating this in some cases.

If you click on the picture it will give you the larger version of the kind of documents we see from time to time. In this instance the client has said they owe over €200,000 but that they lender will take less than half of this, settling on a figure of c. €90,000 to clear in full or they’ll owe the difference if it goes for less.

The property seems to be at a significant discount to others in the same area, and unless the person in question is not being honest (we have no reason to think they aren’t) then the letter indicates over …

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Is getting a debt writedown a gift? Would you have to pay tax on it?

The US model of ‘short sales’ has a hidden sting in it that often gets lost in the noise, namely that the reduction of your debt is often considered a gain and it needs to be reported on your IRS Form 1099 (as opposed to a W2 or 1040) which covers income outside of wages/salaries/gratuities.

Which means that if you sold your property (we’re assuming it is in negative equity) for a €50,000 loss and the bank write that off, that in effect you have a non deductible loss which you didn’t pay and therefore you pay the tax on it (their equivalent of capital gains).

Like the US, Irish investors can offset capital losses against capital gains, in the case of your own home this doesn’t apply. In the American example a write-down creates a tax liability, although not in every state (my home-state of California being an example). This was becoming such a problem that the IRS brought out two special tax codes called ‘The mortgage forgiveness debt relief act …

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RTE News: Personal Insolvency Bill, January 2012

Paul Colgan from RTE covered this story about the proposed Personal Insolvency Bill which will update Ireland’s dated debt legislation. This is a more humane approach to dealing with debt issues and we are pleased to see it coming to fruition. Any legislation will have teething issues and will not be perfect, but this is definitely a step in the right direction.

Our foremost concern (as echoed in the clip) is about the regulation and oversight of any plan.

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