Mortgage Forgiveness Act Exemption Expired on December 31, 2013 And May Have Major Impact on Homeowners Decision to Pursue Bankruptcy in Foreclosure

Since 2007, homeowners who conducted short sales and other loss mitigation alternatives on their properties were able to exempt any income associated with their mortgage company’s write-off of any debt under the federal mortgage forgiveness act.    However, Congress allowed the important tax exemption to expire effective December 31, 2013.   See

While Congress may choose to renew the exemption, it places a burden on homeowners considering their options with properties facing foreclosure which are “underwater”.

As experienced bankruptcy and foreclosure attorneys, we have often counseled clients in similar positions to file a Chapter 7 bankruptcy case, assuming they qualify for the relief under the Code.   If a homeowner files a Chapter 7 bankruptcy case and receives a discharge before the property is lost in a foreclosure – or before the homeowner conducts a deed in lieu of foreclosure or bank-approved short sale of the property – the underlying debt owed to the bank is “discharged”.   Thus, even if the mortgage company later conducts a “write-off” of the portion of the mortgage which was not paid and issues a 1099-C (Cancellation of Debt) Form to the homeowner, the homeowner will be able to exempt that “income”.   A taxpayer who has filed and received a discharge in a Chapter 7 bankruptcy case can file, with their tax return, an IRS Form 982 and properly claim an exemption on any such income.

This only strengthens the argument that any property owner facing foreclosure or a potential foreclosure and considering their options consult with an attorney experienced in foreclosure and bankruptcy law to better know their rights and options.


Contact an Edison Bankruptcy Attorney from Gillman, Bruton & Capone Today

Facing overwhelming debt is a daunting prospect. Calls from creditors and threats of repossession or foreclosure can take a toll on families. It may seem impossible to dig out from a hole and regain financial flexibility and freedom. Thankfully, an Edison bankruptcy lawyer wants to help you. Unlike many other law firms that suggest filing for bankruptcy as the sole chance to escape from under debt, we recognize that many alternatives may be available that bring a similar outcome. Even when bankruptcy is the best option, we provide you with all of the information you need to protect your interests. Give Gillman, Bruton & Capone a call today to schedule an appointment and a free case evaluation.

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