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Mortgage assistance could lead to other debt

In recent posts, we've discussed a number of foreclosure avoidance and debt relief strategies, as well as a recent trend in the housing market of short sales. Today's story alerts readers in Tennessee to a potential debt management issue they could be facing at the end of this year.

Under the Mortgage Forgiveness Debt Relief Act, qualifying homeowners in Tennessee and nationwide who obtained certain reductions in their mortgage debt -- up to $2 million per household -- have not had to pay federal taxes on that relief. Qualifying conditions may have included forgiveness of mortgage debt by a bank in connection with a short sale or foreclosure, a drop in the home's value, other types of aid from banks, or a decline in the owner's financial condition. Although the mortgage assistance relief was still reported on federal tax forms, it was not deemed taxable income.

Since the housing market crisis, many homeowners have enjoyed such relief on the principal of their mortgage loans. Other homeowners have benefitted from the exemption when selling their home through a short sale, or in negotiating with their lenders to make monthly payments more affordable. However, such mortgage relief may soon become a tax issue -- and a potential debt -- for many Americans. Unless further legislation is passed, the mortgage assistance provision is set to expire at the end of 2012.

The timing couldn't be worse, as five of the largest banks in the nation -- Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc. -- recently began providing principal reductions as part of a 3-year, $25 billion settlement of foreclosure abuse allegations. According to one report, the banks had paid out $10.6 billion of mortgage assistance to 140,000 homeowners by the end of June. The average relief received by each household was $76,615.00.

Homeowners who receive principal reductions this year can still utilize the exemption when they file their 2012 federal tax returns. However, other homeowners who receive assistance after this year, pursuant to the banks' 3-year settlement, won't be so lucky if lawmakers don't vote to extend the mortgage debt relief exemption. To prepare for that circumstance, homeowners may benefit from consulting with an experienced bankruptcy attorney. An attorney can help prepare a financial plan that takes into account the potential tax debt and offers other debt management strategies.

Source: Arizona Daily Star, "Mortgage debt relief may bring tax pain," Sept. 10, 2012

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