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New Jersey debt: Tax break on debt forgiveness may end soon

As we enter the last quarter of the year, Congress has yet to renew the Mortgage Forgiveness Debt Relief Act, which is set to expire on Dec. 31. This law provides that any amount of debt forgiven by a lender on a home mortgage loan is not taxable as income for those that qualify under the terms of the law. The expiration of this statute would mean that thousands of New Jersey homeowners would have to pay federal taxes on any amounts forgiven by their lender as a result of a loan modification, short sale, or foreclosure.

Anyone considering a short sale or loan modification as a way to avoid foreclosure may still have time to do so before the end of the year. Those who are already in the foreclosure process can't do much to speed it up, except seeing if the lender would accept a deed in lieu of foreclosure to get things done. Once the homeowner has done all they can to speed up the process, they can only encourage their lender to finalize their paperwork and write off the remainder of the debt before the end of the year.

If Congress fails to renew the act, many homeowners could end up owing thousands of dollars in taxes beginning Jan. 1, depending on how much debt is forgiven by their lender. Congress may approve an extension at the last minute, but for those whose process (short sale, modification, or foreclosure) is close to completion, it may be better to be safe than sorry. Having things wrapped up by the end of this year is the only sure way to take advantage of the law as it currently stands.

For those who are still facing foreclosure and are unable to modify their loan or obtain a short sale, there other options remain. Filing for bankruptcy protection may give some New Jersey homeowners another avenue to save their home in some circumstances. Seeking assistance may even encourage a mortgage lender to work with a homeowner. Filing either a Chapter 7 liquidation or a Chapter 13 debt reorganization may provide a homeowner with some much needed breathing space to deal with their financial issues.

Source: Fox Business, "Short-Sellers, Act Now or Face Big Tax Bill," Polyana da Costa, Oct. 5, 2012

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