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Debt forgiveness expires Dec. 31
by Annie Christian
Apr 06, 2012 | 2269 views | 0 0 comments | 25 25 recommendations | email to a friend | print
Annie Christian
Annie Christian
We all have debts but some debts are worse than others. Excessive debts are debts that we cannot afford to pay off due to insufficient income. Bad debts are debts that own us for the rest of our lives, haunting us wherever we move, following you from job to job. These debts can garnish our wages, and even when we die our spouses and children still have to pay them off somehow.

Homeowners who have mortgage debt in excess of their income are allowed to pursue a HAFA short sale that will forgive their mortgage debt.  Homeowners who qualify for a short sale due to a qualified financial hardship will also qualify for Mortgage Debt Forgiveness. 

If you are one of the homeowners who is living in a home you can no longer afford -- a home that leaves you house poor and broke every month -- please read this article carefully.

On March 1, Sen. Dean Heller wrote a reply letter to Marlene Kelly, title company manager for First Centennial Title. Sen. Heller’s letter confirmed something that we all fear: There are no proposals in the works by Congress to extend the Mortgage Debt Forgiveness in the coming months

What is cancellation

of debt?

Here is a simple example: Cancellation of debt is when you borrow $10,000 and default on the loan after paying back just $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

Cancellation of debt is not always taxable. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.

Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.

Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default.  Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it could result in other tax consequences.

What is the Mortgage Forgiveness Debt Relief Act of 2007?

This act was enacted on Dec. 20, 2007 for homeowners. Basically, the act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

This provision applies to debt forgiven from 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

Consult with your tax expert for more details.

When a homeowner makes an appointment with me to evaluate their homes, they are no longer shocked that their houses are worth only half of what they owed.   They are usually most concerned about being pursued by their lender and the IRS for the deficiency. Please get the word out to all homeowners everywhere that the Mortgage Debt Forgivenss Act is expiring soon -- Dec. 31 of this year. Any homeowner who is finding it difficult to pay their mortgage should ask themselves these questions: Is this mortgage leaving me house poor and broke every month? Do I even like this house? Should I short sell now or short sell later when I lose even more money at this bad investment?

As a real estate agent, I know it is not easy to lose a house that you have once called home. If you look at the picture objectively, the sooner you get rid of a bad investment, the sooner you can get into a good investment.  Trust me, you have been thinking about it.   Please don’t let the Mortgage Debt Forgiveness Act pass you by.

Annie Christian is a real estate broker and owner of The Annie Christian Real Estate Group. She helps with everything from buying and selling to foreclosure and short sale. To submit a question, call 351-5117. Her website is
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