New Yorkers considering home foreclosure may want to keep in mind the expiration of a federal law passed in 2007 to help people going through foreclosure. Known as the Mortgage Forgiveness Debt Relief Act, the measure forgave federal taxes on any unpaid mortgage debt not recouped by a bank at auction. Starting January 1, 2013, however, people who foreclose will once again have to pay Uncle Sam taxes on the unpaid portion.
Some politicians warn that the new tax obligations will harm the housing recovery. For example, one congressman worries that failing to renew the exemption would prompt people to stay in homes worth less than their mortgages. In turn, these people will not have extra cash to pay for other things, a key component of an economic recovery. Another politician likened letting the exemption expire to helping a person up with one hand, then punching them in the face so hard that they fell off a cliff.
Fortunately, whether because of an illness, job loss, an adjustable rate mortgage or some other reasons, New Yorkers under the threat of foreclosure do not necessarily have to choose between staying in a home they are underwater on or take a bath on tax day. Instead, these folks should look into (1) Chapter 13 bankruptcy, known as debt reorganization, (2) loan modifications and (3) short sale. Chapter 13 bankruptcy typically enables people to set up a three-to-five year payment plan on favorable terms. At the end of the payment period, most, if not all, of the person's debts will be forgiven. Loan modification involves negotiating with a lender to lower a person's mortgage payment or interest rate. Lastly, a person can pursue a short sale. These options should only be done after careful thought and professional advice.
Source: Huffington Post, "Mortgage Relief Tax Exemption Set to Expire, Threatening Struggling Homeowners," Sarah Bufkin and Ryan Grim, Nov. 24, 2012