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Willing, I have an idea for avoiding the 1099


sr28b
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Me thinks me has learned something.

I was talking with a CFO yesterday who was in charge of the disposition of $500M of real estate assets held by the RTC in the S & L bailout of the early 90's. He said that a loan can be bifurcated into two loans. One loan is forgiven and the second loan is sold back to the debtor for $1. The maturity date can be 40 years on the second loan.

The bank still gets the write off.

Thoughts?

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If I understand what you're suggesting...in effect, the OC agrees to sell the "forgiven" part of the debt to the debtor, and the debtor therefore becomes a JDB.

I'm sure not a tax expert, but I think the real problem here is the IRS. Its the "forgiven" part that the IRS wants someone to pay taxes on. If they're not going to be getting their taxes off the interest the OC makes on the loan, then they've decided to debtor must pay taxes on the "income".

I would also guess that the IRS treated the S&L bailout differently than they do a "individual consumer sucker bailout".

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..the OC agrees to sell the "forgiven" part of the debt to the debtor..

None of the debt is forgiven.

The loan is split into two loans. One loan is paid by the debtor and the second loan is sold back to the debtor.

Me no tax expert either and I don't play one on the internet, although I do believe that education is the key.

Bifurcation: "A term used in finance that refers to a splitting of something into two separate pieces"

It's my big word of the week so I'll get some mileage out of it.

An ominous vision I'm seeing on the horizon is a tidal wave of 'short sales' as banks try to mitigate this onslaught of delinquencies. Bifurcation (there I used it again) may be a potential solution that doesn't seem to harm the bank at all but could be of profound benefit to debtors.

Willing, I've read your posts and I have learned alot from you - also, based on what I've learned from your posts, I'm like-minded in opinions so I thought I'd run this by you to see what ya thought.

I'll do some more research and report back.

Anbody else? Admin, Lady, Dive, Recovering, etc..?

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I don't see how this helps.

The first loan that is forgiven is subject to 1099.

But I guess maybe there's some loophole that if the loan is bifurcated, it cannot be 1099d until the other loan is mature? Which means you don't have to worry about the tax consequences for 40 years.

Maybe... Or something.

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Wow...I've been looking at this a bit. I guess I was too wound up with my own problems to look at the S&L thing.

From what I've read so far, it looks like the "bifurcation" was kind of a corporate bailout scheme. Rather than hold the corporations that borrowed the money responsible for paying back the loans, it looks like the goverment agreed to bifurcate the loans into the part actually collectable by auctioning off the collateral and then effectively "buy" the uncollectable parts of the loans and pay back the people who put their money into the S&L's in the first place.

I'd be amazed if us little guys had anywhere near that concern from our government...

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It could be a huge boon for consumers to negotiate in this way. There might be something to this.

If someone has $40k of debt forgiven traditionally then that might be $10k or so in taxes owed, but if the loan was bifurcated and sold back to the consumer with a 40 year term then perhaps the taxes are deferred for 40 years.

Although I am in no way, shape, or form, an accountant so I'm hoping others chime in.

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Yeah, I think the thing that made this possible for the S&L's is that it was tax money that paid everybody off. The S&L owners got to walk away, the people who took out the huge loans to buy the properties and finance the business inprovements got to walk away from the loans, and the people who put their savings in the S&L's got most of their money back (thanks to the US taxpayer).

The problem is us poor debtors don't have the clout in washington to buy us enough votes to make this work for us.

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..the bank would have to carry that loan on the old balance sheet as an asset until it matures..

The bank sells the loan for $1 to the debtor and it's no longer on the books from an accounting standpoint or otherwise.

Although I agree that the IRS would probably not be too happy if this went mainstream. In addition, this may be too sophisticated for the employees of a bank workout dept on consumer debt. It may be of benefit/use on a short sale where the loss mitigation dept is considering taking a huge discount of perhaps six figures.

Thanks for the comments and now we have something on CIC if someone searches for bifurcation - if nothing else.

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“The bifurcated mortgage is a sensible idea. The question that you have to answer, with all respect, before you get to the tax question, is, what should the terms of that second mortgage be? How do we protect the taxpayer, the Government, against the possibility that enormous, unintended perhaps, economic rewards can redound to an owner as a result of getting a soft second?”

STATEMENT OF RICHARD RAVITCH, WEDNESDAY, SEPTEMBER 17, 1997

House of Representatives,

Subcommittee on Housing and Community Opportunity,

Committee on Banking and Financial Services,

Washington, DC.

http://commdocs.house.gov/committees/bank/hba43662.000/hba43662_0.HTM

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