Living in Bankruptcy Confusion? Escape The Stress! Nothing But Blue Skies From Now On.


The Mortgage Forgiveness Debt Relief Act of 2007 is set to expire December 31, 2012.  As a result, people who lose their homes to foreclosure will be required to pay taxes on any debt that the bank or mortgage company does not recover after the sale of their foreclosed home.  The same applies to homeowners whose loan principle was reduced by a mortgage modification.  The Internal Revenue Service considers forgiven debt to be taxable income.

The 2007 Mortgage Forgiveness Act was a safe harbor that excepted forgiven debt on a principle residence from being considered taxable income, but that law expires December 31, 2012.   There are other exceptions to the rule that forgiven debt is taxable income.  Please see my article,  Tax Implications of Forgiven Debt and How Bankruptcy Can Help.

It seems ridiculous to penalize a homeowner who could not make her mortgage payments with a substantial tax debt.  Where a homeowner has made every mortgage payment owed, but the housing market reduced the value of the home and put the homeowner “under water,” the homeowner forced to sell “short” would effectively be taxed on money already lost!

Others see the exception offered by the Act as a reward for bad behavior, allowing homeowners off easy when they bit off more than they could chew.

A bill to extend the Act is in Senate but as of now has not been passed.  There is wide ranging opinions on if and when an extension may occur.


Interested in more information on how a bankruptcy can help with your foreclosure problem?  Give us a call at 732-302-9600 or fill out our online consultation form and we will call you.