Federal Tax Exemption for Mortgage Debt Forgiveness Extended Through 2013

According to an azcentral.com article, recent news coverage of worries over the “fiscal cliff” have included concerns about the Mortgage Forgiveness Debt Relief Act of 2007, which was set to expire on January 7, 2013. This law originally was passed in 2007 to provide relief to homeowners experiencing financial distress in mortgage foreclosure proceedings through the end of 2009. Under the Debt Relief Act, homeowners were exempt from federal income taxes on mortgage debt forgiven by lenders through foreclosures, short sales, or mortgage loan modifications. In 2008, the Debt Relief Act was extended to provide relief to homeowners for a six year-period rather than the original two-year period.

With the last-minute passage by Congress of the American Taxpayer Relief Act of 2012, which President Obama is expected to sign this week, relief in the form of this federal tax exemption is extended through the end of 2013. Fortunately for Arizona homeowners, however, they are already protected by the state’s “non-recourse” law. In Arizona, mortgage loans generally are designated non-recourse loans, which means that homeowners cannot be sued for remaining mortgage debt that is owed after a foreclosure action. Under federal tax law, the forgiveness of non-recourse loans results in no tax liability to homeowners. Nonetheless, it is debatable whether Arizona law extends similar protections to homeowners who sell their homes in short sales, so the American Taxpayer Relief Act of 2012 will provide protection for those homeowners, at least through the end of 2013.

Mortgage foreclosures, short sales, and loan modifications are all events that may occur when a homeowner can no longer afford to pay his or her mortgage payments. Depending on the income of the homeowner, the desire of the homeowner to remain in the home, and other facts and circumstances surrounding the particular situation, bankruptcy also may be a legitimate and useful option for dealing with an impending foreclosure. Whether the goal is to simply delay or ultimately prevent the loss of one’s home to foreclosure, Chapter 13 bankruptcy proceedings may be a way to cure any past-due mortgage payments and remain in the home. Contact your Arizona and Las Vegas bankruptcy attorneys today for additional information about how a Chapter 13 bankruptcy might benefit you and your family.