Debt Relief

Our country went through an economic crisis back in 2007 that is almost unprecedented since the Great Depression, the repercussions of which continue even today. We have never seen the volume of foreclosures and bankruptcies that have occurred since that time, and “we” are not out of the woods yet. Congress recently recognized that reality and took action.

The 2016 Appropriations Bill (H.R. 2029) was approved by Congress and signed into law by the President on 12/8/2015.  Buried deep within the tax extension provisions of that Bill (specifically on pages 824-825), the Mortgage Forgiveness and Debt Relief Act of 2007 was extended through 12/31/2016 and made retroactive to 01/01/2015. 

Congress does not always act timely on critical issues that face American citizens (which may be a good thing, as the laborious process of approving new laws requires time to sort through and analyze what they are doing). The wheels of justice may move slowly, as the saying goes, but they are moving forward in this case.

The extension of the Debt Relief Act is significant in that it continues to provide potential relief to homeowners who are facing foreclosure and whose houses are underwater (i.e., the loan amount is greater than the market value of the house). Even today, nine (9) years after the sharp economic downturn, homeowners continue to struggle with upside down mortgages. 

The Act, originally proposed by Congress on 09/25/2007 and signed into law on 12/20/2007, provides a tax exemption for homeowners for income that results from the forgiveness of debt related to foreclosures, short sales, and the principal forgiveness of mortgage loans. Though this relief did not help many homeowners to save their houses from foreclosure, it was a significant relief from the stigma and long lasting effects of the debt.

When a lender forgives a debt or a portion thereof (for example, by waiving its right to pursue a deficiency in a short sale, or electing not to obtain a personal deficiency judgment at confirmation of a foreclosure sale), the amount of debt that is forgiven is generally deemed by the IRS to be income. Since the IRS counts debt that is “forgiven” as income, the lender is required to provide a 1099-C to the borrowers and report it to the IRS, and that “income” deemed taxable as “ordinary” income at the tax rates applicable to the taxpayer whose debt was “forgiven”. 

The Mortgage Forgiveness Debt Relief Act of 2007 has provided significant relief to all the taxpayers who faced foreclosure scenario since 2008. Without the action by Congress, that relief would have ended in 2015. The Extension of the Mortgage Debt Relief Act means that anyone who went through mortgage foreclosure in 2015 may be able to take advantage of it. It was made retroactive to January 1, 2015, so it will apply for anyone filing a tax return in 2016. 

Note that the Act only applies to the foreclosure of a principal residence. Thus the extension of the Act, which expired by its own terms on December 31, 2014, can take advantage of if the extension which was made retroactive to January 1, 2015, going forward. This means that taxpayers who had the unfortunate experience of having to surrender a home in 2015 in foreclosure at a sheriff’s sale or in a forced short sale will not be burdened with income tax on the amount of the mortgage that remained unpaid after the sale.

The extension of the Mortgage Debt Relief Act allows the taxpayer to exclude from their taxable income that “income” that was attributed to the “forgiveness” of mortgage-related debt from the foreclosure and sale or forced “short-sale” of taxpayer’s principal residence.

This means that if you surrendered your primary residence in a foreclosure or short sale in 2015, or if one of these unfortunate events occurs in 2016, you may be able to take advantage of this protection under the latest extension of the Act. the income attributable to the difference between the mortgage debt you owed, and the amount of the sale (which is the “deficiency”) will not be held against you: it will not be taxed.

Foreclosure is a serious matter, but options exist that may afford homeowners an opportunity to avoid a judgment and/or liability.  Before deciding on a course of action, however, it is strongly recommended that you speak with an attorney experienced in foreclosure matters and with a tax professional about your particular tax circumstances to determine whether mortgage debt forgiveness is available to you. You may be pleasantly surprised.

  • lawrence_w_lobbLawrence W. Lobb
  • Drendel & Jansons Law Group
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For other articles on debt relief, bankruptcy and similar topics, check out the Drendel & Jansons Law Group Blog.

If you want to know what this means for you or need immediate help with debt, foreclosure to possible bankruptcy, please contact us now.


1 Comment

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