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Home Foreclosures: 10.7.4.3 Bankruptcy Exclusion

If the COD occurs in the context of a bankruptcy, the entire amount of COD qualifies for exclusion from gross income.507 Consumer debtors in bankruptcy are not bound by the limitations on the amount of the insolvency exception, as the bankruptcy exception takes precedence over insolvency.508

Home Foreclosures: 10.7.4.7.1 In general

For debt discharged before January 1, 2026, either as a result of the homeowner’s financial condition or a decline in the home’s value, discharged acquisition indebtedness may be excluded from income, up to $2 million.530 The acquisition indebtedness exclusion also applies to discharge subject to a written agreement entered into before January 1, 2026, even if the actual discharge takes place at a later date.531

Mortgage Servicing and Loan Modifications: 11.11.4.2 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.

Mortgage Servicing and Loan Modifications: 11.11.5 Attorney Fees

Defendants often seek to “divide and conquer” by offering a settlement that does not include attorney fees, or includes an inadequate proposal for fees creating a conflict between the homeowner and the homeowner’s attorney. This can be a significant problem in foreclosure defense cases where a settlement offer from the defendant may simply provide for a modification of the loan (e.g., write down of principal and/or reduction of interest) without any cash payment.

Consumer Bankruptcy Law and Practice: 18.9.1 Lender Bankruptcies

In recent years, a number of large non-bank lending companies and mortgage servicers have filed chapter 11 bankruptcy cases,997 giving rise to numerous new issues in applying bankruptcy law to the anomalous situation in which the lender is the debtor, and the borrowers are creditors. Several of these cases involved “subprime” mortgage lenders and servicers involved in predatory lending practices, who were defendants in various consumer class actions and government enforcement actions.

Mortgage Servicing and Loan Modifications: 11.11.9 Other Considerations

Change the account number: Most servicers use automated recordkeeping systems. Unless a thorough purge of the existing computer records is done, it is likely that, at some point, when the servicer generates a payment statement or history, some of the forgiven fees in the loan modification may get picked up and swept into the client’s current information.

Mortgage Servicing and Loan Modifications: 11.12.2 Historical Context

The law of preemption has changed over time and was curtailed significantly by the Dodd-Frank Wall Street Reform Act of 2010 (hereinafter the Dodd-Frank Act).831 The Dodd-Frank reforms became effective on July 21, 2011. Prior to that date, the rules governing preemption for national banks differed somewhat from those governing preemption for federal savings associations.832

Mortgage Servicing and Loan Modifications: 11.12.3 Current Preemption Statutory Standard

In 2010, Congress passed the Dodd-Frank Act, which cut back on federal banking agencies’ power to preempt state law. It abolished the OTS, and adopted more restrictive standards for preemption of state law, applicable both to the National Bank Act and to HOLA. Under the current standard, which became effective on July 21, 2011, the NBA and HOLA permit preemption of state consumer finance laws only if:

Mortgage Servicing and Loan Modifications: 11.12.4 The OCC’s Current Preemption Regulation

Any analysis of the scope or application of the Dodd-Frank Act’s preemption provision is complicated by the preemption rules published by the Office of the Comptroller of the Currency (OCC). On July 21, 2011, the OCC published amendments to its 2004 preemption rules,845 purporting to conform them to the Dodd-Frank Act’s requirements. There are, however, significant questions about the scope and validity of the OCC’s 2011 preemption regulations.

Mortgage Servicing and Loan Modifications: 11.2.1 Client Interview

The client interview process is critical in evaluating the homeowner’s potential defenses to foreclosure and affirmative claims. The initial interview defines the scope of the legal services needed based on the problem and the homeowner’s goals. The first client interview also shapes the homeowner’s perception of the lawyer.

Mortgage Servicing and Loan Modifications: 11.3.1 Introduction

Foreclosure cases often involve hundreds, if not thousands, of pages of documents. Ensuring that documents necessary to prove your case are admissible is critical to a successful case. Conversely, excluding inadmissible documents offered by a lender or mortgage servicer can also affect the case outcome. This section considers the application of the Federal Rules of Evidence to various common foreclosure related documents.