Articles

Short Sales Stopped By Second Mortgages

A report by RealtyTrac highlights a problem for borrowers interested in a short sale of their home. According to Bloomberg, a RealtyTrac analysis showed only 4.2 percent of short sales were completed in the first quarter with second mortgages. The Bloomberg story notes that some holders of second mortgages can be demanding during negotiations, and stop a short sale cold. While a second mortgage holder may have the power to cause problems for a short sale, their power is not unlimited. If the home mortgage is underwater, the second lien holder is in the unenviable position of having gone from being a secured creditor to being unsecured. The second mortgage is now the equivalent of credit card debt, because there is no equity in the home to secure it. Relief Through Chapter 13 Bankruptcy Borrowers who are underwater and have a second mortgage could file a Chapter 13 and have the bankruptcy court strip the lien in the bankruptcy. In a Chapter 13, borrowers can reorganize their debts, pay mortgage arrears and remove any second mortgages on an underwater loan. This may give them the flexibility to remain in their home. During the Chapter 13, if they are unable to maintain their plan payments or it no longer makes economic sense to stay in the home, they could convert to a Chapter 7 and discharge most of their remaining debt, including any deficiency balance caused by a short sale or foreclosure. A bankruptcy attorney can provide advice as to whether a Chapter 7 or Chapter 13 bankruptcy would be the best solution for borrowers dealing with an underwater mortgage....

Forgiven Debt May Be Considered Income by the IRS

As many Americans rush to file their 2011 taxes to meet the April 17th deadline, some may wonder whether they have to pay tax on forgiven mortgage debt. Many individuals who have had mortgage debt forgiven after successfully negotiating with a mortgage company may find they owe tax on the forgiven debt, though there are exceptions to the rule. Income Tax on Forgiven Debt The IRS requires individuals to pay income tax on forgiven mortgage debt. Historically, this includes any loan modifications that reduced the total amount owed on a mortgage and mortgage debt forgiven in the event of a foreclosure. The IRS provides this simplified example on its website: If a homeowner had a loan of $10,000, paid back $2,000, then defaulted on the loan, there was a cancelation of debt of $8,000 and that $8,000 is taxable income. Any amount of canceled debt over $600 must be reported to the IRS, even if it qualifies for some of the following exclusions. What Types of Forgiven or Canceled Debt is Non-Taxable Fortunately, a law passed in 2007 protects homeowners who have had mortgage debt forgiven through foreclosure. The Mortgage Forgiveness Debt Relief Act applies to most homeowners who have had debt forgiven on their principal residences. Rental or business properties are not eligible. The forgiven debt must exceed $600 but be less than $2 million and been forgiven between 2007 and 2012. Other canceled debt may also be non-taxable. Debts discharged through bankruptcy are not considered taxable income. Homeowners that can claim insolvency may also be exempt from paying tax on canceled mortgage debt. A homeowner can claim insolvency if his or her...
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