After Bankruptcy: Why did Bank of America Forgive My Second Mortgag...

Lots of people, in current or recent bankruptcy, are getting letters from Bank of America forgiving their second mortgages.

What’s going on?

Here’s the story.  Bank of America, during the financial crisis, lent a lot of money to Countrywide, the giant mortgage lender.   When it looked like Countrywide would collapse anyway, Bank of America took over the whole company.

Now, because Countrywide pulled some shady tricks during the mortgage boom, Bank of America has to settle up for Countrywide’s shenanigans.  Specifically, Bank of America has agreed to forgive $10 billion in mortgage loans.

After bankruptcy, homeowners celebrate Bank of America forgiving second mortgages.

Obviously Bank of America doesn’t want to forgive the loans of people who are paying them–they are a bank after all–they lend money at interest hoping to get more back.  So they are mostly forgiving loans that people are not paying and loans that people have already filed bankruptcy on.

Is that any help?  Well, some.

Many of my clients filed Chapter 7 bankruptcy, stayed in the house and just stopped paying the second mortgage.  That’s my “nerves of steel” strategy.   Those people planned to stay in the house for several more years–knowing they might never have any equity because the second mortgage was still there, just getting further behind.  They were happy just to stay in the house.  Now, with the second mortgage forgiven, those folks can hope to have equity–maybe soon.

Some people file Chapter 13 bankruptcy in order to remove the second mortgage from their house.  Those people wanted to know that when the chapter 13 plan was completed, the second mortgage would be gone–they wanted to be sure they’d have equity some day.  Now the second mortgage is gone instantly.  What should they do?  See if there’s an early exit from Chapter 13.  Is it possible to convert to chapter 7?  There may be income eligibility issues that need to be looked at closely.  Maybe drop out of bankruptcy altogether–if the credit cards and other debts aren’t much.

Do people have to pay debt forgiveness taxes when these second mortgages are forgiven?

Not if you filed bankruptcy.  There no debt forgiveness tax on debts wiped out by bankruptcy.