The latest global recession has left a long-lasting impact on homeownership in the US. Many people started losing their homes because of their inability to make mortgage payments. Downsizing of big corporate firms and industry left many people jobless and that caused a lot of foreclosed homes and the number of homeless people in the US began to grow. I have a friend who recently had to let his mortgager foreclose his home because he could no longer afford to pay his mortgage as he was retrenched by the company he was working for. His name is Phil. The mortgager took his home and managed to resell it to recover most of the amount that Phil owed them. The balance was considered as cancellation of debt.

Phil heard from one of his former colleagues that the amount that was considered as cancellation of debt was taxable and that Phil would have to pay taxes on it. The reason is that the amount was originally considered as expenses. Now that the mortgager has released him from being liable for the balance that could not be recovered from the sale of his home, the amount would logically be considered as taxable income. Phil started to get nervous. He could barely make enough to put food on the proverbial table and now he would have to pay taxes on a house that he no longer owned. The entire idea seemed ridiculous. Actually it was. What Phil’s former colleague probably did not know is that individuals who lost their homes through foreclosure are not required to pay income tax on the amount of canceled or forgiven debt. The same principle also goes for people who applied for a loan restructuring or loan modification program in order to get a lower balance.

Phil, being the thorough guy that he is, went to the local library to find out whether what his former colleague told him was true. At the library, he found information about the Mortgage Forgiveness Debt Relief Act of 2007. Generally the idea was to allow taxpayers who qualify to exclude their principal home indebtedness if the balance of the mortgage was less than $2 million. Basically if the forgiven amount of debt on the home that Phil was residing in was less than $2 million he would not have to pay taxes for it. There may be instances when Phil would probably have to pay taxes on his foreclosed home but the Mortgage Forgiveness Debt Relief Act of 2007 was enacted to protect homeowners who had lost their homes as result of the global recession.

Phil also wanted to find out the tax implications if he were to file for bankruptcy as he also had other debts that he could not afford to pay as he was out of a job. The bankruptcy provision answered his question as it is a helpful provision to individuals like Phil who otherwise would not qualify for tax debt negotiation. Of course, to do so his liabilities must have been more than the fair market value of all of his assets. His home was already foreclosed so the only asset he had was the clothes on his back. He had other debts to pay but no means to pay them.

There were many men like Phil when the recession hit US shores. Having been financially stable at the beginning but having lost his job due to the recession, Phil hit rock bottom. On top of that, he would have to worry about his taxes as well. So Phil was very grateful for the Mortgage Forgiveness Debt Relief Act of 2007 as the Act sort of lessened his burden of debts to a significant extent.

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Category: Finances
Keywords: cancellation of debt, forgiven debt, tax debt negotiation