The three-family home which was used as a primary residence and rental was for foreclosed on in 2012. I purchased this home with two other investors in 2004. We occupied two floors and rented the third for a few years. The relationship went bad and they bought me out in 2007 after I signed a Quit Claim Deed. They were to remove me from the mortgage by refinancing per the contract we all signed, but they waited too long and the housing market crashed. The mortgage was paid on-time until mid-2011. I hadn't claimed this house on my taxes since 2007. My lawyer was able to negotiate a settlement with the bank for legal fees and got them to agree not to send me a 1099-C. The settlement of $11K was reported on a 1099-MISC income form, the entire payment went to the law firm.

Can I claim the 1099-MISC as a bad business investment or loss?

“Can I claim the 1099-MISC as a bad business investment or loss?”============> Generally, you can't deduct fees paid for advice or help on personal matters or for things that don't produce taxable income. The general rule is: you can deduct attorney's fees you pay for trying to produce or collect taxable income, or to help in determining, collecting or getting a refund of any tax. In simple terms, you can take a deduction if you need an attorney's help to make money you have to pay taxes on, or if an attorney helped you with a tax matter, like representing you in an IRS audit. If the legal fees are somehow connected to taxes or taxable income, you can take a deduction.