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Mortgage Forgiveness Debt Relief Act of 2007

by: sahil | last updated: May 13, 2010
Category: Personal Finance | Tags: Mortgage Forgiveness Debt Relief Act of 2007, mortgage forgiveness, debt relief, mortgage laws, mortgages

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Mortgage Forgiveness Debt Relief Act of 2007

Introduced on September 2007 the Mortgage Forgiveness Debt Relief Act became law in the same year in December. Originally the act extends the relief provided for three years applying to debts that were discharged in calendar year 2007 through 2009. However the act has been extended for three more years and covers the debts discharged through the calendar year 2012.

In the United States when the lender forgives the amount of the debt and decides to settle for less then the forgiven amount is considered income for the borrower. This means that this forgiven amount was taxed by the government. The Mortgage Forgiveness Debt Relief Act of 2007 helps in stopping this from happening. In this act, amendments have been made so that the lender and borrower can work together towards a goal that brings about minimum damage to both parties.

The protection provided under the Mortgage Forgiveness Debt Relief Act is only limited to residential properties. This means that properties that are rented out are ineligible as far as this law is concerned. Therefore consultation with a tax advisor is important in order to avoid losses and make the process smoother. The amount of debt that can be forgiven which is excluded from the income tax is limited to $2 million per year.

Recent legislation provides for a more specialized option in which the resident home owner can refinance if certain criteria are met. In this procedure the home owner provides similar documentation that is required for a short sale but instead of selling the home a Federal Housing Administration (FHA) loan at a fixed rate is made available. The FHA backed packages are available from October 2008 and have a fee of 1.5% of the price of the house. However this loan is only available if the lender is ready to write off 85% of the outstanding debtor’s obligations including all the relevant expenses and fees.

The above mentioned program requires consent from the lender and the consent may not be automatic. The consent can be withheld and this withholding of the process can lead to a foreclosure. Therefore it is important to note that the lenders consent in forgiving 85% on the loan plays an important part in the success of the plan.