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The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

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  • The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

    since this subject matter comes up quite often, i thought i would post the entire information on a thread. i do have a blog with the info leading to the sight, but it might be easier for people to see this on this type of format.

    also, as the subject matter has come up in referencing the difference and does one know what a Deficiency Judgment is and how it could harm you financially?

    "A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full. The availability of a deficiency judgment depends on whether the lender has a recourse or nonrecourse loan, which is largely a matter of state law. In some jurisdictions, first mortgages are non-recourse loans, but second and subsequent ones are recourse loans."

    are they covered under the Mortgage foregiveness Act...i really don't know, since in some states it appears they are and in others quite clearly as pointed out on some other threads they are not. interesting to say the least!



    The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

    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
    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
    "A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full. The availability of a deficiency judgment depends on whether the lender has a recourse or nonrecourse loan, which is largely a matter of state law. In some jurisdictions, first mortgages are non-recourse loans, but second and subsequent ones are recourse loans."

    are they covered under the Mortgage foregiveness Act...i really don't know, since in some states it appears they are and in others quite clearly as pointed out on some other threads they are not. interesting to say the least!
    The mortgage forgiveness act has nothing to do with deficiency judgments. If a creditor got a deficiency judgment, then they have not forgiven the debt and there is no income to tax and no reason to ask whether the mortgage forgiveness act applies. The mortgage forgiveness act makes no rules about whether a lender has the right to a deficiency judgment. As you state, that is a matter of state law. It is unrelated to the income tax implications of mortgage forgiveness which is what the mortgage forgiveness act addresses.

    The Act addresses whether forgiven debt is taxable income for federal income tax purposes. If debt incurred to buy, build or substantial improve your principal residence, or debt incurred to refinance such a debt, is forgiven in 2007 through 2012, then this act applies for federal income tax purposes regardless of what state you live in. Whether the forgiven debt is taxable income for state income tax purposes depends on state law.

    If your mortgage is discharged in bankruptcy, you don't pay income tax on the discharged debt. But, that was true before the Act was passed.

    Toobee43, I'm not sure what connection you are seeing between the Act and deficiency judgments and how the act would "cover" a deficiency judgment. I hope the above clears up any confusion.
    LadyInTheRed is in the black!
    Filed Chap 13 April 2010. Discharged May 2015.
    $143,000 in debt discharged for $36,500, including attorneys fees. Money well spent!

    Comment


    • #3
      Lady, what's my question here is simply this...if someone does, in fact, have a deficiency after the bank sells the house, and the scenario is that this property is in a deficiency state, if the ex owner would have PMI....would that cover the deficiency??? i understand we are talking apples and pears here...but..

      also, if one files bk with owning a deficiency judgment, doesn't that alleviate the that debt???

      this inquiring mind what to know..LOL!!!

      i understand the tax ramifications....but what about after a bk discharge and close how does that effect that judgment?????

      thanks!!!
      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
        Lady, what's my question here is simply this...if someone does, in fact, have a deficiency after the bank sells the house, and the scenario is that this property is in a deficiency state, if the ex owner would have PMI....would that cover the deficiency???
        Good question. I did a Google search and found that PMI protects the lender, not the borrower. The bank can still get a deficiency judgment or issue a 1099 for forgiven debt. This is based on 10 minutes of Google research, so I can't say for sure it is accurate.

        Originally posted by tobee43 View Post
        also, if one files bk with owning a deficiency judgment, doesn't that alleviate the that debt???
        Yes. At least it discharges the debtor's personal liability for the debt.


        Originally posted by tobee43 View Post
        i understand the tax ramifications....but what about after a bk discharge and close how does that effect that judgment?????
        After the debt is discharged in the BK, you get the judgment vacated in the court where the judgment was entered. What I am unclear of is what happens if the creditor recorded a judgment lien against other real or personal property before the BK is filed. I believe the lien remains after discharge unless you can get an order avoiding the lien.
        LadyInTheRed is in the black!
        Filed Chap 13 April 2010. Discharged May 2015.
        $143,000 in debt discharged for $36,500, including attorneys fees. Money well spent!

        Comment


        • #5
          Lady, please just one more question...ok..?

          but what if the bk is, or was BEFORE the foreclosure and the bk is discharged and closed and entire mortgage balance was discharged???? the house then goes into foreclosure 10 months after the discharge..( i just made that time period up for the example), so there would be no deficiency judgment to ever have to contend with...right??? because the bank couldn't get that judgment AFTER the debt was discharged??? wow... even for ME that's a mouth full LOL!!

          sorry...
          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
            Lady, please just one more question...ok..?

            but what if the bk is, or was BEFORE the foreclosure and the bk is discharged and closed and entire mortgage balance was discharged???? the house then goes into foreclosure 10 months after the discharge..( i just made that time period up for the example), so there would be no deficiency judgment to ever have to contend with...right??? because the bank couldn't get that judgment AFTER the debt was discharged??? wow... even for ME that's a mouth full LOL!!

            sorry...
            Why would you be sorry?

            Yes, if the foreclosure occurs after the mortgage was discharged in bankruptcy, there is no deficiency because there is no personal liability for the discharged debt.
            LadyInTheRed is in the black!
            Filed Chap 13 April 2010. Discharged May 2015.
            $143,000 in debt discharged for $36,500, including attorneys fees. Money well spent!

            Comment


            • #7
              Originally posted by LadyInTheRed View Post
              Why would you be sorry?

              Yes, if the foreclosure occurs after the mortgage was discharged in bankruptcy, there is no deficiency because there is no personal liability for the discharged debt.
              LadyInTheRed
              Why would you be sorry?
              because i didn't want to be a pain...LOL!! but we all know i am on occasion!
              thanks for that confirmation. that is what i thought, or thought i thought!!!! but it was or is great to geat a betting understanding defined and made clearer..at least for me.


              thanks again!!
              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
                that was suppose to be great to GET....ahhhhhhh

                typing courses coming up soon, i hope. actually, i think one has it or not...i'm a NOT.
                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


                • #9
                  i re-read this post and i must add, the The Mortgage Forgiveness Debt Relief Act and Debt Cancellation does, in fact ,and provided one has met the criteria resolve the issue of a deficiency judgment provided it is withing the provisions of the act.

                  if anyone has actually has experience the contrary please; and i mean have YOU.....YOU.... had to pay on a a deficiency judgment ????? (i think NOT, but i could be incorrect )please please post your journey!
                  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

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