The housing crisis may be over, but that has not stemmed the flow of foreclosures around the country and in New Jersey. Numerous homes are still not worth what their owners owe on them. An estimated 2.3 million homes are still in danger of foreclosure, and many of their owners may be contemplating bankruptcy protection in the aftermath of the recession.
To make matters worse, the Mortgage Forgiveness Debt Relief Act is set to expire on Dec. 31. This act was originally passed in 2007 to give homeowners some tax relief from any amounts forgiven by their lenders. In the absence of the Act, homeowners are required to pay taxes on any amount forgiven by a lender. If the law is not renewed by Congress, millions of people could be facing hefty tax bills on top of losing their homes.
Even though many major lenders are beginning to offer principal reductions as part of a modification, without this law in place, many homeowners will not be able to take advantage of those types of offers. This will simply reopen the possibility of foreclosure. A short sale would potentially put the homeowner in the same position of facing a huge tax bill, so that would also not be an ideal option.
If the Act is not renewed, it may be a surge in bankruptcy filings in New Jersey and around the country. Any debt forgiveness gained from a bankruptcy discharge is not taxable, so many homeowners may use bankruptcy as a way to structure a deal to keep their home or walk away entirely with no worries about taxes accumulating. Either way, filing for bankruptcy could provide homeowners with another option they may not have previously considered.
Source: The New York Times, Debt and Taxes, No author, Dec. 1, 2013