My stepmom is indigent, but has been deemed mentally capable of taking care of herself or handling finances. What can we do?

I'm not sure what you are meaning. Did she gift the house to someone? A mortgage is not an asset. It is a debt and would not disqualify her from receiving Medicaid. If she makes $1300 SS each month and has no other assets, she should qualify for Medicaid in Alabama. I don't think there are any such things as state homes anymore, except for the mentally ill. Even the country nursing facilities are being closed because of the cost and liability of operating them.

If you think your stepmother could qualify and needs Medicaid, talk to someone at your county's human resource department. They should be able to direct you to the person that can help you.

JessieBelle- 1099-C issued on Foreclosures and short-sales are routinely done by the banks and mortgage companies. They do them for the year in which the foreclosure was finalized.....which could be a year or two from when the homeowner walked on the house& it's mortgage.

Between the mortgage balance plus fees & interest, it can morph up into quite a bit of income with taxes due on that income. I'd bet that Often the old homeowner is unaware that a 1099-C was issued as the address on file is different from where they now live. But the banks send the 1099-C to the IRS so there will be a match-up between state database and IRS.

Stepdaughter - she needs to file taxes and it won't be a simple DIY or quicken or turbotax filing either. The free senior tax help from AARP likely wont work either. You need a CPA or maybe one of the tax pros at anH&R Block small biz office (the ones that are open year round, lots of those have old IRS employees). She would file taxes plus an IRS 982 Reduction of Tax Attributes worksheet. It will not be simple as she needs details on property costs to make the 982 work best.

But kinda HAS TO be done....Why? Well if a 1099-C is issued, taxes are due on the whole amount. If IRS does not get paid, they can - as a SuperCreditor - attach her SS income to be paid. I'm not sure how this is exactly done but seems to be about 1/3 of income taken. If state taxes are also due, the state can attach as well. This is a pretty serious situation to be placed into financially. For those on Medicaid in a NH, this morphs into a problem in 2 ways:
the "income" on the 1099-C takes them over the income allowed by Medicaid so there's an ineligibility problem and then if you get that resolved there still will be an issue with IRS supercreditor ability. IRS as an allowed supercreditor can attache some of her $ 1300 SS check then she will not be able to pay her required by Medicaid co-pay aka her SOC (share of cost) of her SS monthly income to the NH. NH must be paid the full SOC, so either family makes up the difference till whenever IRS is happy or she gets a 30 day notice to move out of the NH. The rules for Medicaid residents ability to continue at a NH can be bypassed by a NH (if they want to) as she is not in compliance with the required SOC rules, so she can get a 30 eviction notice. Mañana April 18 taxes or an extension is due.......

Stepdaughter, you mentioned "she had an asset of being on a mortgage", are you saying that your stepmother and your father loaned money to someone to purchase a property, thus created a mortgage? That would be an asset that is bringing in money via interest. Is that why your stepmother wasn't able to qualify for Medicaid?

But you mentioned your Stepmother only has social security, so does that mean the mortgage payments are no longer coming in? Did the borrower stop paying after your father had passed? If so, then the loan become due and payable immediately. But if your stepmother has dementia she probably no longer understood this.

I would contact an Elder Law Attorney to straighten this all out.

She had an asset she gave away. That has to be paid back. You cannot give away assets and then go on Medicaid. It doesn't work that way.

She wrote to me privately. The house was foreclosed and the mother was told she could not qualify for Medicaid because her name was on the house. I asked if a 1099 had been issued for any debt forgiven, but didn't hear back. I am wondering if it was a reported forgiven debt that is pushing her above the limit.