Mortgage Debt Relief Act Set To Expire
Prior to 2007, when a home went through foreclosure the homeowner was not only stuck with a large deficiency balance, he could owe taxes on any debt that was canceled by the lender. While the lender may "forgive" the debt, the tax man does not. To fix this problem Congress passed the Mortgage Debt Relief Act of 2007 which exempted certain types of “forgiven” mortgage debt from federal income taxes. The consequence of this Act is that the homeowner does not owe taxes on a forgiven or canceled mortgage debt.
This law has become even more important as homeowners are receiving notices from banks that forgive their second and third mortgages. Additionally, Fannie Mae and Freddie Mac have issued significant new policies streamlining the process for short sales, through which underwater borrowers can sell their home for less than what they owe on their mortgages.
In most cases the forgiven or canceled debt qualifies under the Mortgage Debt Relief Act of 2007, and no taxes are owed. Unfortunately, that may all change soon as the Act is set to expire on December 31, 2012 as part of the dreaded "fiscal cliff."
If Congress fails to extend the Act, millions of struggling families may face a serious tax bill for home debt that is canceled or forgiven. Many will be surprised by the tax consequences after working diligently with the lender to save their homes. The absence of this tax break will also undermine the recent Attorneys General settlement with mortgage companies to prevent foreclosures with principal reductions, short sales, and deeds-in-lieu-of-foreclosure – all chief components of the Obama administration’s Home Affordable Modification Program. To prove that "politics makes strange bed fellows," this issue has forged a strange alliance of civil rights advocates, consumer groups, and bankers who all call for extending the Mortgage Debt Relief Act of 2007.
The Mortgage Debt Relief Act of 2007 is only one of many consumer protection laws that an experienced attorney can use to help you through your debt crisis. If you need to walk away from your home, bankruptcy will discharge the debt and any tax debt associated with its surrender. Bankruptcy can provide you with debt relief and a fresh financial start. Speak with an experienced bankruptcy attorney and discover how to use the federal and state laws to your benefit.