What is the Debt Relief Act of 2007?

Article by T. Vigneau

The Mortgage Forgiveness Debt Relief Act of 2007

In recent years the sub-prime fiasco has propelled the need for a comprehensive debt relief act into the fore front of our national financial policy. Though sub prime mortgages actually constitute only 7% of all the loans in the country, it accounts for 43% of the loans that have been actually foreclosed in the third quarter. In 2007 According to the Mortgage Bankers Association, over 989,600 were in foreclosure. And prior to the Debt Relief Act, you would have been taxed by the government on the forgiven debt that occurs from a foreclosure, for the government considered that as taxable income.

The Mortgage Forgiveness Debt Relief Act of 2007 was enacted to amend the IRS Code of 1986 to exclude discharges of indebtedness on principal residences from gross income. The Mortgage Forgiveness Debt Relief Act was introduced on the floor of the Congress on September 25, 2007 and was signed into law by President George Bush as Public Law 110-142 of the 110th Congress and became law on December 20, 2007.

“When your home is losing value and your family is under financial stress, the last thing you need is to be hit with higher taxes. So I’m working with members of both parties to pass a bill that will protect homeowners from having to pay taxes on cancelled mortgage debt.”- President George W. Bush, September 1st 2007

This act gave relief to homeowners who owed taxes on forgiven mortgage debt after facing foreclosure. This Act will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. The act gives relief to debts discharged in calendar year 2007 through 2009. In 2008 the Emergency Economic Stabilization Act extended this time period another three years, covering debts discharged through calendar year 2012.

After the signing of the law, amendments have been made to eliminate such tax liability and allow the borrower and lender to work together to find a common solution that is good for both parties. This protection is limited to primary residences, rental properties are ineligible for relief. However some tax professionals have reported that there is no indication in the tax code that would disqualify a duplex from the Mortgage Forgiveness Debt Relief Act if half of the duplex was purchased for and used as your household residence. But these special cases are for the experts to wrestle with. It would be wise to contact a tax consultant to determine eligibility since the amount of forgiven mortgage debt allowed to be excluded from income tax is limited to ,000,000 per annum.

However, since the 2007 Debt Relief Act, the money that is forgiven is reported using IRS Form 982. The forgiven money is no longer classified as additional income, (unless it came from a second residence), and so individuals no longer have to pay the additional tax on this amount. The legislation provides for a specialized type of refinancing option, available for mortgages made after 2006, for homes which are physically occupied by the owners. Under this program a debtor provides information similar to that necessary for a short-sale but rather than selling the house to a third-party an FHA guaranteed loan at a fixed-rate is available if the original lender is willing to write-off all but 85-percent of outstanding of the debtor’s obligations (including principal, interest, late-fees, prepayment penalties, and all other fees). FHA-backed refi’s have been available since October, 2008, and carry a fee equal to 1.5% of the homes value. Those who exercise this option must sacrifice 50 to 100 percent of the equity, and may not participate in any home equity loan programs. This program requires written permission from a lender: consent is not automatic and may be withheld, though withholding consent can result in a foreclosure with adverse financial results which is a lose-lose situation for both parties.

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T.Vigneau is the publisher of http://getdebtreliefnow.net and is dedicated to providing help and resources to people who are having financial difficulties. T.Vigneau offers debt solution resources from nationally recognized and accredited companies.










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