Expiration of the Mortgage Debt Relief Act – Should I be Worried?

The Mortgage Debt Relief Act of 2007 is set to expire at the end of 2012 and many Florida homeowners facing foreclosure are concerned about the effects this will have on their situation.  However, before you stress too much, there are several points you should know about this Act and how it can affect you.

First, you need to know a little about how foreclosures and deficiencies related to them work.  Let’s say you’re one of the many Florida homeowners who owe more on your home than the current value of the home.  If your mortgage is for $250,000 but your home is currently valued at $150,000, the $100,000 difference is the deficiency that would still be owed to your lender—even if your home goes into foreclosure.  For many people, this deficiency is money that the lender would still be able to collect on.  Not only would you lose your home, but the lender would also be able to collect on the $100,000 deficiency, even after foreclosing on your home and forcing you to seek for another place to live. 

However, many lenders are offering forgiveness of the debt that would otherwise be considered the deficiency on your mortgage, especially if it means getting you out of the home so they can attempt to resell it.  The problem with this is according to federal tax code, that forgiven debt is considered to be income for you and is taxed as such.  This means that even if the lender forgives the deficiency you would otherwise owe on the mortgage after the foreclosure, you could still be taxed for the entire amount.  For some people, this is a very high amount! 

The Mortgage Debt Relief Act of 2007 provides relief to people who were granted forgiveness of deficiencies by their lender, stating that they are no longer responsible paying taxes on them, so it’s a very real concern for many people facing foreclosure as to whether or not this Act will be extended past 2012.  However, since it has already been extended and this is an election year, it is highly likely that it will be extended again.  Even if it’s not, one way of avoiding that potentially huge tax liability is to just file bankruptcy. Either way, talk to a qualified foreclosure or bankruptcy attorney to review your options.