Impact of The Mortgage Forgiveness Debt Relief Act of 2007 on Homeowners Facing Foreclosure

Get Legal Help Today

 Secured with SHA-256 Encryption

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Full Bio →

Written by

UPDATED: Oct 24, 2013

Advertiser Disclosure

It’s all about you. We want to help you make the right legal decisions.

We strive to help you make confident insurance and legal decisions. Finding trusted and reliable insurance quotes and legal advice should be easy. This doesn’t influence our content. Our opinions are our own.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

One unanticipated consequence for the borrower working out a deal with the lender is that forgiven debt is still counted as borrower’s income for tax purposes. The creditor has written off the debt, but the taxpayer cannot exclude it from his income. For example, if a borrower owes $100,000 on a credit card, and the credit card company settles the debt for $50,000, the $50,000 the borrower is no longer required to pay back, is still considered income.

The Mortgage Forgiveness Debt Relief Act of 2007

Previously, the homeowner who paid less than his originally required mortgage could avoid a significant tax liability only if the borrower could prove insolvency. This was a complicated process and sometimes impossible to prove. The Mortgage Forgiveness Debt Relief Act of 2007 (set to expire at tne end of 2013) makes an exception for certain situations involving mortgages. The Act permits borrowers to exclude from income amounts forgiven on the borrower’s principal residence. The Act does not apply to investment properties or second homes, and it only applies to residential mortgages. It does not apply to credit cards or car loans. The exclusion is also limited to $2 million ($1 million if married and filing separately).

Consider consulting a tax attorney in a foreclosure situation to find out your liabilities.

Get Legal Help Today

Find the right lawyer for your legal issue.

 Secured with SHA-256 Encryption