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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.

Home Foreclosures: 8.10.4.2 Settlement Should Specify Nature of All Damages

In all cases, attorneys should take care to specify the source of the damages. Replacement for out-of-pocket costs will be non-taxable; replacement for lost income, occasioned by, for example, time off work, will be taxable. Out-of-pocket costs may include repairs made to a home, return of excess interest paid, the inflated value of a purchased home, as well as more mundane out-of-pocket expenses, such as medical bills and transportation costs.

Home Foreclosures: 8.10.4.3 Reflecting Tax Consequences in Settlement Amounts

The client may want to insist on a higher recovery to offset taxes on the award and any tax implications of the attorney fee award.797 If the client will retain a tax adviser, those fees should be planned for in the settlement. Otherwise, the taxes or fees could erode whatever benefit the client may have otherwise received from the settlement.

Mortgage Servicing and Loan Modifications: 11.11.2 Confidentiality

Settling defendants often request that the settlement prohibit the parties from disclosing the terms of the settlement to anyone. A second, less extreme clause does not prohibit disclosure altogether, but prohibits publicity. Such clauses raise a host of concerns. They enable defendants to cover up massive wrongdoing, and create procedural obstacles if judicial enforcement of the settlement becomes necessary.