Arizona to spend foreclosure settlement award on homeowners, deficit
Arizona received $98 million as the state’s share of a $25 billion national mortgage settlement reached between 49 states and the nation’s five largest mortgage servicers. The state plans to use about half of the money to prevent more foreclosures in Arizona, while about $50 million is slated to bring down the state’s budget deficit.
Arizona’s plans for national mortgage settlement money
The Arizona Attorney General has committed to spending about $57 million on preventing more foreclosures and providing monetary assistance to homeowners. $47 million of this money will come from the national mortgage settlement, while the remaining $10 million is covered by a separate settlement reached between Arizona and Bank of America.
Of the $51 million, $41 million will be given to struggling homeowners to help them stay in their homes and to homeowners who were wrongly foreclosed upon by banks. The money will come in cash payments, loans or reductions in mortgage principal.
In addition, some homeowners with second mortgages held by Bank of America have begun to receive letters notifying them that the principal on a second mortgage has been forgiven. Bank of America receives a credit, dollar for dollar, for forgiving all or part of a mortgage’s principal. Forgiveness of the second mortgage’s principal should also be accompanied by a release of the lien on the property; however, it is not yet clear whether Bank of America intends to release its liens.
Homeowners who receive a second mortgage principal reduction may need to pay taxes on the forgiven amount, since it counts as income according to the IRS. However, homeowners who have declared bankruptcy or can show they are insolvent may be exempt from paying taxes on the forgiven amount.
The state Attorney General emphasized that Arizona will make a strong effort to ensure settlement money will go to responsible homeowners rather than those who decided to walk away from their mortgage payments even though they could have afforded to pay them, or homeowners who bought more house than they could afford to flip the property and sell it for profit.
However, there is criticism of the state’s decision to spend $50 million from the national mortgage settlement on its budget woes, which does not directly help homeowners who were unfairly foreclosed upon, to whom the money is supposed to go. A lawsuit has already been filed against the state to prevent the use of national mortgage settlement funds for budget deficit reduction.
Extension of the Mortgage Forgiveness Debt Relief Act
In 2007, the Mortgage Forgiveness Debt Relief Act was passed to give homeowners who had had a loan forgiven, made a short sale or modified their mortgage loan a break on paying taxes on the income from those actions. The act was set to expire with the fiscal cliff, but the last-minute evasion of the cliff extended the Mortgage Forgiveness Debt Relief Act through 2013.
How bankruptcy may help homeowners avoid foreclosure
For those struggling with mortgages and other debts, filing for bankruptcy may help homeowners stay in their properties and rebuild their financial lives. Filing for bankruptcy places an automatic stay on all debt collection, including foreclosure proceedings. Those who qualify for Chapter 13 bankruptcy may be able to keep their homes if they develop a repayment plan that includes making timely payments on the mortgage loan.
To learn more about the national mortgage settlement and if bankruptcy may be a good option for you, contact an experienced bankruptcy attorney.