By Bonnie L. Beutler
In this tough economy, property owners are facing a short money supply and many are considering “walking away” from their mortgages. This article answers some of the difficult questions faced by property owners.
I cannot afford to make my mortgage payments. What are my options?
If you do nothing, the bank will probably foreclose, take ownership of the property, charge you for its foreclosure costs and hold you responsible for the difference between the (low) buy-back price and the amount owed on your loan.
One alternative is to file bankruptcy, which will temporarily freeze foreclosure proceedings. However, filing for bankruptcy is not simple and has its own repercussions. So, it’s best to consider negotiating one of the following options with your lender if possible:
- A forbearance agreement – you reduce or suspend your payments for a particular length of time. You eventually resume regular payments and make the delinquent payments at the end of the loan.
- A repayment plan – you have failed to make payments and to cure the problem, your monthly payments are increased until the loan is current.
- A loan modification – the loan terms are revised. This could mean the interest rate is reduced and/or the loan is extended (i.e. you pay the debt in more payments).
- A short sale – you sell your home to a third party for an amount that is generally less than the debt to the lender. The lender agrees to remove the mortgage so you can convey good title to the buyer. However you may be asked to bring additional money to the closing for the lender and/or to sign a promissory note, where you promise to pay lender the difference between the sale price and the debt.
- A Deed in Lieu – the lender accepts ownership of the property. Generally, to qualify, the property must be free of other mortgages/liens. You should not unilaterally “drop off” a deed to the lender without prior negotiations.
President Barack Obama signed the American Recovery and Reinvestment Act of 2009 into law on February 17, 2009. At that time, President Obama introduced the Homeowner Affordability and Stability Plan (“Plan”) to address the foreclosure crisis. The Plan is designed to help families restructure or refinance their mortgages to avoid foreclosure. However, at the time this article was written, the Plan had not yet become law. As a result, this article does not address the alternatives available under the Plan. Check www.kempklein.com for updates.
If the lender agrees to forgive my loan debt, will the IRS tax it as income?
Yes, generally a taxpayer is taxed on debt that is forgiven. However, according to the Mortgage Forgiveness Debt Relief Act of 2007 (the “Act”), when a lender forgives a debt that is secured by a principal residence, it is not taxed to the homeowner as income. To avoid being taxed, the following must be true:
- The debt was forgiven on the person’s principal residence. It cannot be debt forgiven for a second home, a rental property, credit cards, etc.
- The balance on the loan was less than $2 million. The limit is $1 million for a married person filing separately.
- The debt was forgiven in 2007 through 2012.
- The debt was used to buy, build or substantially improve the taxpayer’s principal residence and was secured by that residence. Debt used to refinance qualifying debt is eligible, but there are limitations.
A lender that forgives a debt will send out a Form 1099. In order to benefit from this statute, the homeowner must file Form 982 with their federal income tax return.
For further information regarding these matters, please contact Ms. Beutler at 248.740.5690 or click here to send an email.
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