Mortgage Forgiveness Relief Act of 2007

    The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on  December 20, 2007 to assist homeowners who are in such a predicament.  Normally, a homeowner, in an attempt to  avoid foreclosure would modify their current mortgages, that is, "short sell"  the property, or deed their home in lieu of foreclosure back to the bank  holding the lien on the property.  Such  remedies often leave the homeowner with a debt for property no longer in their  possession.  In most situations the  lender would forgive the homeowner's debt either in part or full.  Unfortunately this left the homeowner facing  an additional and in most cases, undischargable financial difficulty, the IRS.  That debt which is so graciously forgiven by  the lender is now recognized as taxable income by the IRS.  The homeowner receives a tax bill for the  forgiven amount for money forgiven and never truly received. 
   
  The Mortgage Forgiveness Debt Relief Act is designed to exclude such  debt forgiveness on the principal residence if the balance of the loan was less  than $2 million for a debtor's primary domicile. The act only applies to that  debt which was forgiven in the 2007, 2008 or 2009 tax years. Debt reduced  through mortgage restructuring, as well as mortgage debt forgiven in connection  with a short sale or foreclosure, may qualify for this relief.  The requirements are that the debt must have  been used to buy, build or substantially improve the taxpayer's principal  residence and must have been secured by that residence. Debt used to refinance  qualifying debt is also eligible for the exclusion, but only up to the amount  of the old mortgage principal, just before the refinancing. 
   
  What does this mean to the homeowner in trouble?  Everything.   There is now another option available to them, which will not lead them  from one financial frying pan to the other.   Prior to the Act, homeowners would attempt to negotiate with the lender  not to forgive the deficit in the loan but to file suit against them.  This was the strategy in the reasoning that  a judgment lien is dischargeable under a Chapter 7 or Chapter 13 bankruptcy  were IRS liens are not.  IRS tax liens  remain through the bankruptcy filing and distribution and the homeowner would  end up with the lien coming out on the other side of the bankruptcy.  Leaving them in the same predicament of  owing money on income never actually received.  
 
The Act will not extend to other forgiven debt such  as those on second homes, income or rental property, business property, credit  cards or car loans.  In those instances  the filing of a Chapter 7 or Chapter 13 bankruptcy might be in the homeowner's  best interest depending on the financial situation he is presently in.   The homeowner should always consult with an  attorney regarding what strategy would be in their best interest.

The forgoing article on the Mortgage forgiveness Act was drafted by The Law Office of Goldstein and Clegg, a Massachusetts bankruptcy law firm

Article submitted Thursday, August 21, 2008
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