Is there a law that says, after being 7 months behind on payments, the creditor can report the loan amount as income and we will be taxed on it

The creditor is apparently writing the amounts of your payments As a charge off or bad debt for tax purposes. This lets the creditor take a loss on its income tax. If they in fact write off the debt, then the tax laws do permit the bank to issue a Form 1099 reflecting A loss matter, which in turn means a gain to you, in theory, as the tax laws sees this as an economic benefit to you. All this may not seem like a benefit to you, as the creditor is causing you an adverse tax consequence, but the tax law does permit it.   Another consequence from this though may be that the creditor should not make further efforts to collect these late payments from you, as it has already taken the loss,received a tax benefit and caused you a detriment. This is only a legal theory, and I have not seen it approved by any court.   Even if the creditor stopped collection efforts, it is uncertain what impact this would have on any right to foreclose the properTy securing the loan. Perhaps it only affects the ability of the creditor to collect on a deficiency between the sale of the property upon foreclosure and the balance of the loan, at least for the amount at issue here with the charge-off.   Bottom line, really, is that you probably should talk to a lawyer that can counsel you about the debt, any other obligations you may have trouble meeting and look at any programs grams that may help you modify the loan and possibly avoid a foreclosure.