During the housing downturn that much of the country has been dealing with over the course of the last few years, homeowners, including many in the Miami area, have turned to short sales and principle reduction loan modifications as a way to deal with homes that are worth less that the amount owed on the loan. These options became particularly appealing to underwater homeowners when the Mortgage Forgiveness Debt Relief Act of 2007 was adopted.
Prior to the act, homeowners had to pay taxes on the amount of money that was forgiven in the loan modification or short sale. In some cases this served as a deterrent to homeowners who otherwise would have addressed their financial situation in one of these ways. Under the act however, in some situations these sometimes large taxes are forgiven.
The act is set to expire at the end of this year which would put homeowners who are underwater in their homes in a position where they could lose their houses to foreclosure. Should it expire and not be extended in 2013, there are other ways that homeowners may be able to hold on to their homes, at least for a while.
One way this could be accomplished is by filing for bankruptcy. A bankruptcy filing results in an automatic stay being put into place on foreclosure actions. This essentially means that the foreclosure is put on hold. Depending on the type of bankruptcy filed and the amount owed to creditors, it is possible that a plan could be out into place that would allow the filer to keep his or her home. A bankruptcy attorney can determine whether that will work for you.
Source: San Francisco Chronicle, “Clock ticking on forgiven-debt tax break,” Carolyn Said, Sept. 17, 2012