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Home Foreclosures: 8.8.2.1 Scope

The Truth in Lending Act (TILA), as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), effectively prohibits forced arbitration of disputes involving closed-end loans secured by a dwelling and open-end loans secured by a consumer’s principal dwelling.646 TILA defines a residential mortgage loan as “a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against the co

Mortgage Servicing and Loan Modifications: 11.9.3a.2 Does the Court or Arbitrator Decide Whether a Clause Is Enforceable?

A preliminary matter in any challenge to the enforceability of an arbitration clause is whether the enforceability determination is to be made by a court or by the arbitrator. In Rent-A-Center, West, Inc. v. Jackson,689 the Supreme Court held that, “ordinarily,” issues about whether parties have agreed to a valid arbitration clause are for a court—not an arbitrator—to decide.

Home Foreclosures: 17.4.10.3 State Credit Services or Credit Repair Organization Laws

About three-fourths of the states have credit services or credit repair organization laws.613 These laws cover organizations that offer to improve a person’s credit rating for a fee. Most also cover organizations that offer, for a fee, to obtain an extension of credit for a consumer and that are not licensed or chartered by the state or federal government.614 These laws are summarized in NCLC’s Fair Credit Reporting.615

Mortgage Servicing and Loan Modifications: 11.9.3a.5.1 Individual arbitration

Where an enforceable arbitration agreement forecloses class arbitration, class action litigation in court, and individual court litigation, adequate client representation may require raising the consumer’s claims in an individual arbitration proceeding. Even if an arbitration agreement is not enforceable, it can take years to resolve this issue before even reaching the merits.

Home Foreclosures: 8.9.2 Pain and Suffering Damages

The tax code excludes from gross income damages (other than punitive damages) received on account of personal physical injuries or physical sickness.739 In general, emotional distress is not treated as a physical injury or physical sickness.740 Usually compensation for purely emotional distress (other than medical expenses) is taxable, even when that emotional distress is accompanied by such physical symptoms as insomnia, headaches, and stomach disorders.741

Home Foreclosures: 8.9.3 Multiple, Statutory, and Punitive Damages

Many statutory claims that homeowners raise in defending a foreclosure, such as violations of the Truth in Lending Act, Real Estate Settlement Procedures Act, or state UDAP statute, carry with them the possibility of statutory or multiple damages. In general, statutory damages are taxable, unless state law views them as reflecting non-taxable, compensatory damages.744 Sometimes state law treats statutory or minimum damages as a proxy for a compensatory award that is difficult to prove.

Mortgage Servicing and Loan Modifications: 11.10.1 Introduction

Under the tax code, gross income is broadly construed as income in any form (money, property, or services), from any source, unless specifically excluded by law.739 Generally, the amount of gross income minus applicable deductions is taxable.740 Consequently, money damages and loan forgiveness or “cancellation of debt” resulting from a court award or settlement is generally considered taxable income.

Mortgage Servicing and Loan Modifications: 11.10.2 Pain and Suffering Damages

The tax code excludes from gross income damages (other than punitive damages) received on account of personal physical injuries or physical sickness.747 In general, emotional distress is not treated as a physical injury or physical sickness.748 Usually compensation for purely emotional distress (other than medical expenses) is taxable, even when that emotional distress is accompanied by such physical symp

Home Foreclosures: 10.7.3.1 General Rule

Debt is frequently forgiven in connection with short sales, deeds in lieu, and other pre-foreclosure workout options or post-foreclosure agreements to forego collection. Debt may also be forgiven by statute if a lender, for example, elects to proceed through a non-judicial foreclosure. Whether forgiven by agreement or by statute, this forgiven debt is taxable as ordinary income unless an exception applies.448

Mortgage Servicing and Loan Modifications: 11.10.5 Damages Relating to Overpayment

Capital returned to the homeowner, whether by cash payment or cancellation of debt, is not taxable income.756 In home defense cases, there may be compensation for amounts improperly overcharged or taken from the homeowner, routine out-of-pocket expenses, including medical bills, transportation costs, or property damage. Homeowners may also be entitled to a return of other monies wrongfully paid, including a refund of excess interest.

Home Foreclosures: 10.7.4.1 Overview

COD income can be excluded from gross income in the following situations: when the consumer is insolvent or has filed bankruptcy; when a debt is disputed or contingent; in the case of interest and fees, under the purchase price infirmity doctrine; and as acquisition indebtedness that is discharged before January 1, 2026.494 A typical consumer might qualify for either of two exceptions involving: (1) debt cancellations made while the debtor was insolvent,495 or (2) discharges made in a bankruptcy

Home Foreclosures: 8.9.1 Introduction

Under the tax code, gross income is broadly construed as income in any form (money, property, or services), from any source, unless specifically excluded by law.732 Generally, the amount of gross income minus applicable deductions is taxable.733 Consequently, money damages and loan forgiveness or “cancellation of debt” resulting from a court award or settlement is generally considered taxable income.

Home Foreclosures: 8.10.4.1 Overview

Settlements in which a homeowner receives money damages or cancellation of debt may result in tax liability. As a general rule, settlements should contain language regarding potential tax issues.