Mortgage Forgiveness Debt Relief Act Expired at the End of 2013.
If you owe a debt to someone and that party forgives or cancels the debt, that canceled amount of debt may be taxable. As a part of the Mortgage Debt Relief Act of 2007, homeowners were able to exclude from income debt that was reduced on their principal residence. This included:
- Short sales;
- Mortgage restructuring, such as a loan modification;
- Foreclosure, etc.
This tax relief expired at the end of 2013 leaving homeowners financially vulnerable if they experience help from their mortgage company. What does this mean for you? Be sure you understand the financial implications of any mortgage transaction:
- Will you have tax debt and if so, what is the amount?
- Evaluate if you can afford the tax liability and how that will impact your budget at the end of the year.
- Determine if the mortgage transaction is positive for your overall finances in light of this additional tax liability:
- Will the tax liability create a debt you cannot afford to pay?
- Are you financially better off even if you have reduced the mortgage debt given you new tax liability?
Our firm helps clients resolve mortgage issues and other debts through the use of a Chapter 13 and Chapter 7 bankruptcy. Traditionally bankruptcy has gotten a bad rap½rumors that it ruins you credit for 10 years or that a Chapter 13 plan doesn't allow you disposable income to pay your living expenses are simply not true. The simple reality is that either program is a financial tool to help reorganize and reduce debts with the benefit of court oversight. There are additional benefits and protections that you may not be aware of.
Chapter 13 allows you to:
- Modify or surrender your mortgage debt without tax implications.
- You can surrender your home voluntarily or through foreclosure and eliminate the mortgage debt as well as any tax liability.
- You can modify your mortgage loan through the program without incurring a tax debt.
- A Chapter 13 will legally stop a foreclosure sale with ongoing court protection from your lender.
- Eliminate a second mortgage or home equity loan. Again, this does not become a taxable event.
- Reduce and likely eliminate unsecured debts, such as credit card, medical bills and personal loans.
- Restructure a car loan to reduce an interest rate or possibly reduce the principal debt, depending on how long you have owned the vehicle.
Chapter 7 allows you to:
- Eliminate unsecured debt and mortgage debt related to a foreclosure or voluntary surrender.
- Re-negotiate your car loan through use of the 722 redemption program.
- Create a clean credit slate to begin rebuilding your credit.
Call us for a free evaluation of your finances and mortgage loan options. Timing is important! If you receive mortgage loan forgiveness that creates a tax liability, that debt becomes non-dischargeable. In order to discharge the debt in a bankruptcy, the tax debt must be owed for a minimum 3 years (and all returns must be filed timely - you cannot apply for extensions and still have the return deemed timely filed).
Consider your credit.
Although bankruptcy is typically considered detrimental to your credit, most people are surprised to learn that experiencing a foreclosure is worse in terms of a future home purchase or gaining new credit. The reason? Your new lender or creditor is concerned that the lender that foreclosed will pursue debt collections for the loan deficiency. These collections efforts continue to damage your credit or worse, a garnishment could render you unable to pay your bills. A short sale has the same impact as a foreclosure on your credit.
Chapter 13 bankruptcy works to improve your credit by:
- Focusing on principal debt reduction, improving your debt to income ratio. The debt to income ratio influences 30% of your credit score according to FICO.
- Establishing consistent monthly payments to your creditors. This affects another 35% of credit score.
- No further late reports to the credit bureaus.
You should expect your credit score to improve as you continue through the repayment process. While it is listed on your credit report for 7 - 10 years, the Chapter 13 does not negatively impact your credit for that time period. Debts that have been resolved work to improve your credit standing and create less risk for future creditors. Our firm's sole focus is debt resolution and credit restoration. Call us today at 866-261-8282 for a free consultation with a licensed Michigan attorney to understand your options to long term financial success.