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Your Banktrupcy & The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

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  • Your Banktrupcy & The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

    i just wanted to post a "reminder" about "The Mortgage Forgiveness Debt Relief Act and Debt Cancellation" and how it will no longer be in effect after 2012, we only have ONE more year to apply the act. time is passing!!!

    it does effect many of us who are or will be filing bankrutcy and listing our homes, forclosing and or short sales (which in my opinion would be covered under the act as well) however i'm not certain.


    "If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

    The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

    This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

    More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.

    The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:

    What is Cancellation of Debt?

    If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

    Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

    Is Cancellation of Debt income always taxable?

    Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

    Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.

    Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

    Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.

    Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.

    Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.


    These exceptions are discussed in detail in Publication 4681.

    What is the Mortgage Forgiveness Debt Relief Act of 2007?

    The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

    What does exclusion of income mean?

    Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

    Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?

    No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing
    separately.

    Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?

    Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

    How long is this special relief in effect?

    It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.

    Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?

    The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.

    If the forgiven debt is excluded from income, do I have to report it on my tax return?

    Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

    Do I have to complete the entire Form 982?

    No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.

    Where can I get this form?

    If you use a computer to fill out your return, check your tax-preparation software. You can also download the form at IRS.gov, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.

    How do I know or find out how much debt was forgiven?

    Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

    Can I exclude debt forgiven on my second home, credit card or car loans?

    Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for further details.

    If part of the forgiven debt doesn't qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?

    Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not required to include forgiven debts in income to the extent that you are insolvent. You are insolvent when your total liabilities exceed your total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. Publication 4681 discusses each of these exceptions and includes examples.

    I lost money on the foreclosure of my home. Can I claim a loss on my tax return?

    No. Losses from the sale or foreclosure of personal property are not deductible.

    If I sold my home at a loss and the remaining loan is forgiven, does this constitute a cancellation of debt?

    Yes. To the extent that a loan from a lender is not fully satisfied and a lender cancels the unsatisfied debt, you have cancellation of indebtedness income. If the amount forgiven or canceled is $600 or more, the lender must generally issue Form 1099-C, Cancellation of Debt, showing the amount of debt canceled. However, you may be able to exclude part or all of this income if the debt was qualified principal residence indebtedness, you were insolvent immediately before the discharge, or if the debt was canceled in a title 11 bankruptcy case. An exclusion is also available for the cancellation of certain nonbusiness debts of a qualified individual as a result of a disaster in a Midwestern disaster area. See Form 982 for details.

    If the remaining balance owed on my mortgage loan that I was personally liable for was canceled after my foreclosure, may I still exclude the canceled debt from income under the qualified principal residence exclusion, even though I no longer own my residence?

    Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

    Will I receive notification of cancellation of debt from my lender?

    Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form.

    What if I disagree with the amount in box 2?

    Contact your lender to work out any discrepancies and have the lender issue a corrected Form 1099-C.

    How do I report the forgiveness of debt that is excluded from gross income?

    (1) Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income on line 2. Any remaining canceled debt must be included as income on your tax return.

    (2) File Form 982 with your tax return.

    My student loan was cancelled; will this result in taxable income?

    In some cases, yes. Your student loan cancellation will not result in taxable income if you agreed to a loan provision requiring you to work in a certain profession for a specified period of time, and you fulfilled this obligation.

    Are there other conditions I should know about to exclude the cancellation of student debt?
    Yes, your student loan must have been made by:

    (a) the federal government, or a state or local government or subdivision;

    (b) a tax-exempt public benefit corporation which has control of a state, county or municipal hospital where the employees are considered public employees; or

    (c) a school which has a program to encourage students to work in underserved occupations or areas, and has an agreement with one of the above to fund the program, under the direction of a governmental unit or a charitable or educational organization.

    Can I exclude cancellation of credit card debt?

    In some cases, yes. Nonbusiness credit card debt cancellation can be excluded from income if the cancellation occurred in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See the examples in Publication 4681.

    How do I know if I was insolvent?

    You are insolvent when your total debts exceed the total fair market value of all of your assets. Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts.

    How should I report the information and items needed to prove insolvency?

    Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent immediately before the cancellation. You were insolvent to the extent that your liabilities exceeded the fair market value of your assets immediately before the cancellation.

    To claim this exclusion, you must attach Form 982 to your federal income tax return. Check box 1b on Form 982, and, on line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately prior to the cancellation. You must also reduce your tax attributes in Part II of Form 982.

    My car was repossessed and I received a 1099-C; can I exclude this amount on my tax return?

    Only if the cancellation happened in a title 11 bankruptcy case, or to the extent you were insolvent just before the cancellation. See Publication 4681 for examples.

    Are there any publications I can read for more information?

    Yes.
    (1) Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) is new and addresses in a single document the tax consequences of cancellation of debt issues.

    (2) See the IRS news release IR-2008-17 with additional questions and answers on IRS.gov."

    http://www.irs.gov/individuals/artic...179414,00.html
    Last edited by tobee43; 10-21-2011, 11:01 AM.
    8/4/2008 MAKE SURE AND VISIT Tobee's Blogs! http://www.bkforum.com/blog.php?32727-tobee43 and all are welcome to bk forum's Florida State Questions and Answers on BK http://www.bkforum.com/group.php?groupid=9

  • #2
    Also keep in mind, presently, both this act, the Mortgage Debt Forgiveness Act and HAMP/HARP are set to expire next year. So, if you are going to short sale or foreclose on your primary residence better get that ball rolling and if you are trying for a modification, better double your efforts.

    Comment


    • #3
      Originally posted by HHM View Post
      Also keep in mind, presently, both this act, the Mortgage Debt Forgiveness Act and HAMP/HARP are set to expire next year. So, if you are going to short sale or foreclose on your primary residence better get that ball rolling and if you are trying for a modification, better double your efforts.
      exactly! i know many people are or have been "waiting" it out, or holding off, but if they want to take advantage of these time sensitive programs, they must get a move on and take come action for themselves.

      by the way, just curious has HAMP really worked for anyone???? i mean that on a long term basis. i have only heard nightmare stories i.e. HAMP lowered my payment for six months, but then tripled it. or, added so much to the back of the loan it was unreal. i hope someone got something good out of that program. i hope.
      Last edited by tobee43; 10-21-2011, 11:16 AM.
      8/4/2008 MAKE SURE AND VISIT Tobee's Blogs! http://www.bkforum.com/blog.php?32727-tobee43 and all are welcome to bk forum's Florida State Questions and Answers on BK http://www.bkforum.com/group.php?groupid=9

      Comment


      • #4
        Originally posted by tobee43 View Post
        exactly! i know many people are or have been "waiting" it out, or holding off, but if they want to take advantage of these time sensitive programs, they must get a move on and take come action for themselves.

        by the way, just curious has HAMP really worked for anyone???? i mean that on a long term basis. i have only heard nightmare stories i.e. HAMP lowered by payment for six months, but then tripled it. or, added so much to the back of the loan it was unreal. i hope someone got something good out of that program. i hope.
        The Jury is still out I am afraid. The people that got the interest rate reduction with the step up, 2% for 1st year, 3% second, 4% third, and 5% fixed for remainder (30 years) (or some variation on that) should be okay unless they were seriously underwater on their house. Reason I say that, it will take them a decade or more to get back to even, so they are trapped in the house and if they have any future income issues, will end up BK'ing and walking anyway. If they weren't too terribly upside down, they should be okay so long as income recovers. However, I think history will tell use that HAMP was pretty much a failure and probably a bad idea from the beginning as it only delayed the inevitable for most homeowners.

        Comment


        • #5
          Originally posted by HHM View Post
          The Jury is still out I am afraid. The people that got the interest rate reduction with the step up, 2% for 1st year, 3% second, 4% third, and 5% fixed for remainder (30 years) (or some variation on that) should be okay unless they were seriously underwater on their house. Reason I say that, it will take them a decade or more to get back to even, so they are trapped in the house and if they have any future income issues, will end up BK'ing and walking anyway. If they weren't too terribly upside down, they should be okay so long as income recovers. However, I think history will tell use that HAMP was pretty much a failure and probably a bad idea from the beginning as it only delayed the inevitable for most homeowners.
          the most frightening point of that, is one does not know what the future will bring. today one may have a job, and tomorrow it's gone in a blink of an eye. committing to making payments for any period of time today, is indeed, risky at best.

          i for one, believe that we most likely will never see again the cost of real estate values that they once were. it's a lose lose.
          8/4/2008 MAKE SURE AND VISIT Tobee's Blogs! http://www.bkforum.com/blog.php?32727-tobee43 and all are welcome to bk forum's Florida State Questions and Answers on BK http://www.bkforum.com/group.php?groupid=9

          Comment


          • #6
            Originally posted by tobee43 View Post
            by the way, just curious has HAMP really worked for anyone???? i mean that on a long term basis. i have only heard nightmare stories i.e. HAMP lowered my payment for six months, but then tripled it. or, added so much to the back of the loan it was unreal. i hope someone got something good out of that program. i hope.
            In a way it worked for me. Went through the process -- yes it is a nightmare -- did not get a "HAMP" modification because my "investor" BofA was not participating. However, I did get an in house mod - fixed 3.5% on a jumbo loan, previously had a 6.125% I/O ARM. To get the mod I had to stop paying my mortgage, which led to my credit being trashed which ultimately led to the business decision to file BK.

            Comment


            • #7
              Originally posted by msm859 View Post
              In a way it worked for me. Went through the process -- yes it is a nightmare -- did not get a "HAMP" modification because my "investor" BofA was not participating. However, I did get an in house mod - fixed 3.5% on a jumbo loan, previously had a 6.125% I/O ARM. To get the mod I had to stop paying my mortgage, which led to my credit being trashed which ultimately led to the business decision to file BK.
              when we were going through the HAMP process we too, were told we had to stop paying the mortgage to quaify. we did as told and 90 days later we got a NOD from Chase...were told to keep patient, 7 months later nothing another 2 months still nothing.....then we got served. HAMP didn't work for us.

              i'm glad you got your interest lowered for a minute, but it seems to me, i hear more stories like yours and mine then any other.
              8/4/2008 MAKE SURE AND VISIT Tobee's Blogs! http://www.bkforum.com/blog.php?32727-tobee43 and all are welcome to bk forum's Florida State Questions and Answers on BK http://www.bkforum.com/group.php?groupid=9

              Comment


              • #8
                The programs don’t seem to work as intended. A few got lucky, but not many. I knew of a couple of people who received the mods early on. One is still able to pay his and it worked out fine for him. The other is about to file for BK due mainly from his business losses, but also because of his home. That guy had the step up interest rate but with a 400K balloon payment due at the end of the 30 year mod loan. His original loan was like 600K.

                Comment


                • #9
                  Originally posted by angles View Post
                  The programs don’t seem to work as intended. A few got lucky, but not many. I knew of a couple of people who received the mods early on. One is still able to pay his and it worked out fine for him. The other is about to file for BK due mainly from his business losses, but also because of his home. That guy had the step up interest rate but with a 400K balloon payment due at the end of the 30 year mod loan. His original loan was like 600K.
                  how unfortunate for this poor guy...socking him at the end of his loan. he'll pass in debt, and his poor family. it's such a shame.
                  8/4/2008 MAKE SURE AND VISIT Tobee's Blogs! http://www.bkforum.com/blog.php?32727-tobee43 and all are welcome to bk forum's Florida State Questions and Answers on BK http://www.bkforum.com/group.php?groupid=9

                  Comment


                  • #10
                    I got my 1st loan permanently modified w/BOA back in 2010...it's the 2nd that has given me hell...I sent nine packages from July 2010 - Feb 2011...all were denied for very stupid reasons IMO (never received paperwork, investor not part of the program, etc)....after the last denial in Feb 2011....I gave up and told them I would not be paying them any longer....I have now filed my BK7 last friday (10/28)...so they can go kick rocks....that is...unless they want to settle with me....we shall see.

                    Comment


                    • #11
                      I have seen 2, yes 2 successful loan modifications, out of hundreds of people trying. One of them came AFTER we'd filed a Chapter 13 case to stop the scheduled foreclosure sale! The other one is not verified, so I don't know the details.

                      Look up the proposed "principal paydown plan", now THAT would help a lot of homeowners, should it ever see the light of day.
                      Any information posted by me is for general informational purposes only. While I am an attorney, I am not YOUR attorney and any information I provide is not legal advice.

                      Comment


                      • #12
                        Originally posted by BKAttyMI View Post
                        I have seen 2, yes 2 successful loan modifications, out of hundreds of people trying. One of them came AFTER we'd filed a Chapter 13 case to stop the scheduled foreclosure sale! The other one is not verified, so I don't know the details.

                        Look up the proposed "principal paydown plan", now THAT would help a lot of homeowners, should it ever see the light of day.
                        We are in the process of attempting a loan modification now. We are NOT hopeful at all. The bank changes the rules of the game daily. First they want this, you give it to them, then they want THAT and it has been going on for over 4 months now. We have no hope at this point. We think really the banks are just out to hurt us more. That is just the way we feel about it.

                        Comment


                        • #13
                          well, it appears the board stats speak for themselves???
                          8/4/2008 MAKE SURE AND VISIT Tobee's Blogs! http://www.bkforum.com/blog.php?32727-tobee43 and all are welcome to bk forum's Florida State Questions and Answers on BK http://www.bkforum.com/group.php?groupid=9

                          Comment


                          • #14
                            I called my bank to see if we could change our mortgage.
                            All I got from them, "Sorry but if you are filing for BK then your credit score wont be good. So there is really nothing we can do to change your loan. Even if you plan on re affirm the loan.
                            8-25-2011 - Free Consultations. -- 9-03-2011 - Decided to file Pro Se
                            9-15-2011 - Filed Chapter 7 Pro Se -- 10-17-2011 - 341 Meeting/No Asset Case
                            Discharged 12-21-2011 - Case Closed 12-27-2011 - Another Pro Se'r has done it!!

                            Comment


                            • #15
                              They can't take your bankruptcy into account when doing modifications. You're not looking to refinance (maybe that's what they thought you meant when you said "change the mortgage"?), you want to do a modification. You can do this through the Making Home Affordable program.
                              Any information posted by me is for general informational purposes only. While I am an attorney, I am not YOUR attorney and any information I provide is not legal advice.

                              Comment

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