Bankruptcy and the Mortgage Forgiveness Debt Relief Act of 2007

English: Foreclosure signs, Mortgage crisis,

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Homeowner Debt Relief

Congress passed the Mortgage Forgiveness and Debt Relief Act of 2007 in response to homeowners owing tax mortgage debt after facing foreclosure. The Emergency Economic Stabilization Act (EESA) in 2008 extended this tax relief another 3 years until the end of 2012.

Federal mortgage law has been interpreted to say in the past, before the new relief laws, that any amount of a mortgage debt a borrow forgives is to be treated as income. The Federal Government and Internal Revenue Service concurred with that interpretation of the Federal law. Under the old law, any recipient of debt forgiveness was reported to the IRS with a 1099 form, and the recipient had to pay income taxes on the windfall.

The signing of the Mortgage Forgiveness Debt Relief Act of 2007 clarified the interpretation of the old law to forgive the taxes too, a relief felt primarily by those who had lost their jobs and were facing foreclosure and possible bankruptcy. Mortgage foreclosure along with a high unemployment rate are two of the largest contributors to financial failure and bankruptcy filings.

Bankruptcy Debt Relief

For those people filing a Chapter 7 bankruptcy, the mortgage debt is forgiven in the form of being discharged, and the automatic stay prevents a foreclosure on the property. That means the debtor is no longer responsible for the mortgage debt on the property mortgaged, and the debtor does not have to deal with the mortgage company until the bankruptcy is complete.

Until relief came in the form of the new law changes, those receiving a mortgage debt discharge through bankruptcy protection were still responsible for paying the income tax on the discharged debt. The Federal Government looked at the forgiveness of the loan as income, even though many of the bankruptcy filers had no jobs.

The burden of paying the taxes on such debt, losing a job, having to file for bankruptcy protection, and facing an economy that did not look anything like it was going to recover was far too much to handle for many of those filing bankruptcy.

What Happens to Those Filing Bankruptcy After the Relief Act Expires?

As the laws currently stand, if you file a bankruptcy after the end of 2012, you will most likely get a 1099 once again on your discharged debt. Unless Congress extends or makes the relief permanent, the relief is just temporary.

Unfortunately, income taxes are exempt from bankruptcy discharge in most circumstances. That is one good reason Congress should grab the bull by the horns and make the relief permanent for discharged debt. There is nothing for the Federal Government to gain from forcing people to pay what they cannot pay, or at least, the greatest majority of them.

Solutions other than forgiveness of the debts have been offered. New laws passed addressing the modification of mortgage loans have been recently offered to allow homeowners to stay in their homes and prevent a foreclosure. Unfortunately, the laws have lacked “legal teeth” to bring the mortgage lenders to the table. Maybe it is time to realize the economy and housing market have been mortally wounded, and it might take radical legislation to solve the issues. Too many empty houses sit across the nation that need to be filled with happy paying homeowners.

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