Mortgage Forgiveness Debt Relief Act – Mortgage Debt Help

Beginning on January 1, 2013, homeowners who choose — or are forced — to surrender their home may lose a valuable right. The law, known as the Mortgage Forgiveness Debt Relief Act of 2007, gives homeowners with an underwater mortgage needed tax relief from the IRS when their home is returned to the mortgage lender or sold for less than the principal loan balance.  A mortgage is considered “underwater” when you owe more than the property is worth. Whenever $600.00 or more of a debt is forgiven as a result of settling a debt for less than the balance owing, the creditor may report the amount forgiven to the IRS on a 1099(c) form as income.

Foreclosed HomeIf you “short-sell” your home, or return it to the lender via a “deed-in-lieu of foreclosure” or foreclosure itself, you may be taxed on the difference in the value between what is owed on the mortgage and what the property is worth. This is true also for those whose principal is reduced through mortgage loan modification.

For example, if you owe your lender $100,000, but the property sells for, or is worth, only $75,000 you may be taxed on the difference ($25,000) as “imputed income”– as if you had earned an extra $25,000 of income. You will be asked to pay tax on income you never received with cash you probably don’t have.

The Mortgage Forgiveness Debt Relief Act presently allows certain individuals to avoid paying that tax–if they can establish they were “insolvent” at the time of the sale or surrender. The Act is part of the so-called “fiscal cliff” negotiations between Congress and the President. But if the law “sunsets” on December 31, 2011, as it will if it is not renewed, the only way to escape this tax will be to discharge the debt in a Chapter 7 or Chapter 13 bankruptcy.

Of course, most families who find themselves in this predicament likely also have other debts which may necessitate filing of a Chapter 7 or 13. If you give up your home in a bankruptcy case, any tax which might have been owed on the sale or surrender of the property will generally be excused along with your other dischargeable debts.

If you simply walk away from your home you may  be sued for any deficiency if the bank auctions the home for less than you owe.

You may first want to consider a loan modification through which the mortgage company may (1) reduce you interest rate; (2) bring your loan current; and even (3) substantially reduce your principal.

Before you make any decision about surrendering your home, you should consult a professional who is experienced in foreclosure and bankruptcy law on the best course of action. The Marietta law firm of Roderick H. Martin & Associates, P.C., has represented numerous Atlanta homeowners in successfully surrendering their homes without tax consequences. Contact us today so we can help you make an informed decision about the best way to handle your problem mortgage debt.