April 23, 2018

Are There Tax Consequences if You Surrender Your Home in Bankruptcy?

I recently received an email from a very concerned Chapter 7 client who I represented in 2006.  My client had suffered a fairly drastic reduction in his income and as part of his Chapter 7, he surrendered his home, which has a fair market value of approximately $650,000.  There were no objections in this case, and my client received his discharge as a matter of course.

Around the first of February, 2007, my client received a 1099 from the mortgage company showing that $599,000 of debt was forgiven.  I checked with my colleague, CPA Scott Rittenberg, who advised me that in a non-bankruptcy context, a homeowner who sells or loses a home to foreclosure could be liable for taxes on the difference between his basis in the home (in this case around $500,000) and the forgiveness ($599,000).  Would my client be looking at an income event in the amount of $99,000?

Scott did note that if my client had been in his home for two years or longer there was a $250,000 exclusion that applied, but absent a two year stay, there could be a tax problem.  Scott advised me to look further to research the rules about how a bankruptcy might change things.

I did a quick search on the BankruptcyLawNetwork blog and I found this post that answered by question about the tax treatment of a forgiveness of debt in bankruptcy by my colleague, attorney Cathy Moran of Mt. View, California.  Cathy publishes a very comprehensive and informative California bankruptcy law web site that speaks to many consumer bankruptcy issues.

Cathy advises that if you get a 1099, you should file a Form 982 to advise the IRS that the debt forgiveness occurred in bankruptcy and has no tax consequences.

2008 Update: you can read another informative post about the tax treatment of debt forgiveness in a bankruptcy on Taxgirl’s blog in a post entitled “Foreclosures, Debt Forgiveness and Mortgage Losses Explained.”  Click on the link to read this post.

Needless to say, my client is much relieved by the answer to his question.  Tax consequences arising from a deed in lieu of foreclosure in a non-bankruptcy setting could have significant and unintended consequences.  If you have option of executing a deed in lieu vs. a bankruptcy, keep the tax issues in mind.

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.


  1. I have filed for a BK7 my court date is Feburary 8. I am going through a divorce. We both left the home. It is getting ready to be sold at a lesser value. My question is since i filed a BK7 do i have to pay for the back taxes on the home? we stopped paying the morgage sometime in march i believe

    thank U

  2. I have filed a chapter 7..how long to I have before I am kicked out of my home

  3. Criss, I can only speak to the procedures common in the Northern District of Georgia, where I practice. Generally, if you state your intention to surrender in your Chapter 7 petition, that will trigger the mortgage company to hire counsel and file a Motion for Relief from Stay. Once the stay is lifted, the lender will begin the foreclosure process. In Georgia, that involves advertising the property for sale in the official county newspaper for four weeks. Foreclosure would be the first Tuesday of the month following the advertising. If you are still there, the lender (or foreclosure purchaser) will file an eviction notice and the judge in the eviction proceeding will usually give you 7 to 14 days to leave.

  4. I was so glad to find this answer regarding taxes on a house included in a Chapter 7 bankruptcy! I’m going to try to file my paperwork with a lawyer, and this was a huge concern for me.

  5. Gary Dufresne says:

    My wife and filed chapter 7 in 2009.The debt was discharged in March of 2010.We surrendered our house in this due to not getting help from mortgage co.starting June,2010 we got mail from our mortgage Co. demanding money to settle the debt.Then we were told they transferred our mortgage to another Co. and they are doing the same thing plus calling us constantly,i thought by surrendering it, it would stop this harassment but this is not the case.Is there anything we can do legally to stop this? Please help!!!

  6. Gary, if you surrendered the house in Chapter 7, and you received a discharge, then you no longer have any liability on this debt. Any effort to collect a discharged debt is a per se violation of the discharge stay.

  7. Pamela Browne says:

    I filed a chapter 7 in March 2011, was discharged on July 2011. In the filing, I surrendered my home. Owed too much and it severely depreciated because of the housing situation in GA. I vacated the house in July 23rd and told the mortgage company I am no longer there. How do I surrender the property to them? You know…just hand over the keys and move on with my life? They were talking about Deed in Lieu of Foreclosure but it’s an intense process…almost like applying for another mortgage. They want tax returns and paystubs…! and I’m saying, wait, I surrendered the property. I was discharged from that debt. All I want to do is give you back the keys and then the property is in your hands. Any comments?

  8. Rob Mehrtens says:

    Pamela: exactly the same here, even our lawyer was like what are they talking about. The Chap 7 went through fine, Surrendered the property, Discharged. Then we keep getting calls and I question the bank as to why, they say your name is still on the deed, we are exercising our rights to the property, etc, I say Go get it, its yours, don’t let me stop you. They say its still ours. They start pushing us to do Deed in Lieu, saying if it goes to foreclosure it will be bad for tax purposes. Thats what got me here. Deed in Lieu is just as much work as the bankruptcy itself, hell no. It is for people in different situations who have not gone through bankruptcy, as far as I can see. Most importantly, after following the above link, I see it clearly stated that discharge or debt in bankruptcy has no tax implications. So, deed in lieu or regular foreclosure, it matters not for us, we just have the accountant file a form 982 to counter their form 1099C “income” claim. I am done talking to the bank, I will defer to our lawyer. Screw the bank, we lost $80000 on this and “rented” for $2000 a month with absolutely nothing to show, they can choke on that house. This is the game they are playing now …. if it were worth more than we owe, it would have been long since sold. Deed in lieu must be a much better deal for the bank somehow, but I dont care. Bottom line, our names will remain on the deed “technically” until they go do something with it, and that could be years, literally. So what, any maintenance of the property must either be done by the bank or for instance if the county moves in and mows the lawn, they will slap a lien on the deed, which will transfer to the next owner (the bank, you would think, but surely they will leave it sit there until a new buyer comes in, then they will have to deal with it or negotiate with the bank). Technically we the “owners” will get notices of such maintenance, but I don’t care what anybody says, the bank knows damn well its their house now, but its not worth it to them to do anything yet….

  9. John Dougherty says:

    My sister was recently divorced(11mon.), but the house is still in both her and her ex’s name. Neither one of the can afford the home, so she applied for a DIL and was approved by the lender. She told me they said she could not have a mortgage for 2 years. Does this mean I could not give her and her daughter’s a home free of debt to start over?
    Please comment, Thanks

  10. A mortgage is a debt instrument. If you give her a home free and clear, no mortgage is involved. No reason I can see that you could not do that.

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