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Tax breaks for homeowners seeking debt relief set to expire soon

Appleton, Wisconsin, homeowners may be interested to know that certain benefits for distressed homeowners may soon be coming to an end. The Mortgage Forgiveness Debt Relief Act of 2007 offers income tax debt relief to struggling homeowners when lender forgives a portion of the principal owed on a mortgage.

Generally speaking, forgiven debt is considered taxable income; however, under the MFDRA, the homeowner is not obligated to pay taxes on the amount that a lender forgives in connection with a short sale or loan modification. .

The MFDRA is set to expire at the end of 2013, so now may be a good time for distressed homeowners to consider alternatives to foreclosure. However, the mortgagor may be unwilling to work with the homeowner and will proceed to try to sell the property at a public auction. Aster an auction, the balance of the principal is then charged to the homeowner as a debt owed to the mortgagor, even though the homeowner has lost the home.

In cases where alternatives to foreclosure are unavailable, bankruptcy is an option that can prevent foreclosure or, at the very least, delay the process with an “automatic stay.” An automatic stay temporarily prohibits creditors, including mortgagors, from pursuing all collection attempts until the bankruptcy case is closed. In cases where income is available to pay the monthly mortgage, a Chapter 13 bankruptcy can help homeowners to keep their home by making regular monthly payments while working out a plan to catch up the delinquent payments over time.

Appleton homeowners who are struggling to pay their mortgage should keep in mind that there are several debt relief options available. Which option is right for each homeowner can only be determined by an individual examination of each homeowner’s financial situation.

Source: Capital Gazette, “Real Estate Insider: Mortgage forgiveness debt relief window may be closing,” Jeff Ross, March 24, 2013

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