At the last minute, U.S. Congress passed legislation in an effort to avoid the so-called fiscal cliff. One particular inclusion in the final-hour passage has many homeowners across the nation breathing more easily: the one-year extension of the Mortgage Forgiveness Debt Relief Act of 2007.
The Act, often referred to as the “Debt Forgiveness Act,” brought tax relief to many struggling homeowners who received forgiveness of portions of their mortgage debts by their banks. The Act was due to expire at midnight on December 31, 2012.
In 2007, the country never imagined that the recession would drag on for as long as it has. As of last fall, in the Chicago area, home values still have not rebounded to 2001 values and short sales and foreclosures are still occurring at record levels. As 2012 drew to a close, underwater homeowners were scrambling to close negotiations with their mortgage lenders in order to avoid the tax implications.
Tax Benefit provided by the Debt Forgiveness Act
The tax benefit the Act provides is this: if you bought a home for $300,000 and lost it in foreclosure when its value was only $200,000, the bank may have forgiven the balance of debt still owed, in this case, $100,000. Normally, the homeowner would have to pay income tax on the $100,000 of debt forgiven: the Debt Forgiveness Act erases that tax liability.
If the Act had not been extended by Congress, any amount forgiven by a mortgage lender would be taxable at the homeowner’s income tax level, adding more debt for those already in financial distress.
Financial woes continue
However, the extension of the Act is only a small part of the financial difficulties many Americans face. According to Chicagomag.com, there were more than 30,000 short sales and foreclosures in northern Illinois in just a 10-month period in 2012.
Although consumer debt levels are falling, the numbers of foreclosure actions continue to increase in Illinois. Employment rates are heading in the right direction but, for many, the recovery is too slow and thousands are still at risk of losing their homes.
Available options for financial help
Help is available if you are having difficulty paying any of the following:
- Mortgage payments
- Credit card debt
- Unpaid parking tickets
- Auto loans
Filing for bankruptcy may be a good option if you are struggling to keep up with your debt load. For those who qualify, a Chapter 7 bankruptcy can erase your unsecured debts, stop creditor harassment and get you back on solid financial footing. A Chapter 13 bankruptcy can help you renegotiate your debts and make your payments more manageable without having to lose your home.
For advice about how to retain your home, file for bankruptcy or simply assess your options, contact an experienced Chicago bankruptcy lawyer.