Posts Tagged ‘Mortgage Forgiveness Debt Relief Act’

Mortgage Forgiveness Debt Relief Act

The Mortgage Forgiveness Debt Relief Act was introduced in early 2010. Before this Act was introduced, things used to be quite horrible for those consumers who had to lose their homes in foreclosures because they were unable to make the timely repayment on their mortgages. The majority of those former homeowners in the United States of America would not only lose their homes, but they would also find themselves trapped in a financial liability to pay huge tax bills on the remaining outstanding balance of their debts that the sales proceeds could not cover. However, things have significantly changed since the introduction of the debt forgiveness act relating to mortgages. Following are some of the very basic things that you must know about the legal provisions imposed by this act.

What Exactly Is It?

As per the provisions explained in the Mortgage Forgiveness Debt Relief Act of 2007, if a homeowner loses his or her in foreclosure because of nonpayment of mortgage, he or she will no longer owe anything toward their mortgage debt regardless of the fact whether the sale of home covers the entire debt or not. There will not be any tax liability on them anymore in relation to that home. The forgiven mortgage debt will be completely excluded from their taxable income.

Debt Discharge

There is a wide array of factors that are taken into account when it comes to determining the amount of debt that can actually be discharged as per the provisions of the Mortgage Forgiveness Debt Relief Act. But, in all cases, no further collection attempts can be made by the mortgage lenders.

Taxes On Discharged Debts

It is very important for you to understand that when debts are discharged or forgiven by a creditor, it is legally treated as a loss for the lender and a profit or income for the debtor. If the debtor comes into a tax bracket because of this income, he or she will be liable to pay taxes on that income, which is nothing but a forgiven debt. However, this thing does not apply to mortgage debt anymore. This scenario was applicable prior to the introduction of the Mortgage Forgiveness Debt Relief Act. Now that the act has been implemented, there will not be any tax liability on the debtor who loses his or her home in foreclosure even if the sales proceeds from the foreclosed home is less than the actual amount of mortgage due. The mortgage company now does not have any option other than to forgive the remaining balance of debt if any. It means, with the new laws, a discharged mortgage debt is still a loss for the lenders, but it is not legally considered as an income for the debtor.

It is also very important to note that this 2007 Act applies to only those mortgage debts that are discharged during the time period between 2007 and 2012. Last, but not the least, you must also keep in mind that the Mortgage Forgiveness Debt Relief Act also imposes certain eligibility criteria to qualify for mortgage forgiveness. For example, you will get the tax relief on the forgiven mortgage debt related to the foreclosure of only that property, which you were using as your primary residence. The tax relief is not applicable in cases of foreclosures of commercial properties.

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