Are you Eligible for Relief under the National Mortgage Settlement?

September 3, 2012

OVERVIEW

The National Mortgage Settlement will offer various forms of relief for distressed families who qualify. As provided by the Center for Responsible Lending, the below is a preliminary guide that offers information for those who may be eligible for relief.

The Settlement administrators (designated by participating states*), state attorneys general and the mortgage servicers** involved in the lawsuit will identify homeowners eligible for benefits. These benefits may include immediate cash payments, loan modifications with mortgage balance reductions, or refinancing. If you are eligible, you should receive a letter from the administrator in your state. All actions resulting from the settlement are scheduled to take place over the next three and a half years.

Please note that benefits are not guaranteed even if you meet eligibility requirements; every case will be considered individually. However, you may be eligible for help under the national mortgage settlement if any one of these situations applies to you:

  1. You lost your home to foreclosure between 2008 and 2011; OR
  2. You are current on your mortgage payments, but underwater (you owe more on your mortgage than the current value of the house); OR
  3. You are behind on your mortgage or at immediate risk of falling behind.

For the most up-to-date information, click here.

*All states are participating except Oklahoma.
**Mortgage servicers are the companies or banks that receive and process mortgage payments and handle other administrative tasks related to home loans.

AM I ELIGIBLE FOR HELP?

Scenario 1: You have already lost your home to foreclosure.

Potential Benefits

Cash payment of approximately $1,800-$2,000 If you still owe any money on the mortgage because of an outstanding balance after a foreclosure sale, you may have an opportunity to have some or all of that debt forgiven.

Preliminary Checklist for Eligibility

  • When you owned the home, you occupied the house as the owner, and the property had no more than four separate units.
  • Your foreclosure sale was completed between Jan. 1, 2008 and Dec. 31, 2011.
  • Your mortgage was serviced or owned by Bank of America, JPMorgan Chase, Citibank, Wells Fargo or Ally Financial (formerly GMAC).

Process

  • If you are eligible for benefits, you should receive a claim form in the mail from the settlement administrator.
  • If you are concerned you will be difficult to locate, you should contact your Attorney General’s Office, and they will forward your information to the appropriate person to ensure you are contacted if you are eligible.

Scenario 2: You are current on your loan, but underwater.

Potential Benefits

Eligible underwater borrowers may have an opportunity to refinance loans at lower interest rates.

Preliminary Checklist for Eligibility

  • You own and occupy your property, and your property has no more than four separate units.
  • Your mortgage is serviced and owned by one of these banks: Bank of America, JPMorgan Chase, Citibank, Wells Fargo, and Ally Financial (formerly GMAC). Note that Fannie Mae and Freddie Mac-owned loans may be eligible for refinance under a separate program called HARP. To see if your loan is owned by Fannie Mae or Freddie Mac, go here.
  • Your mortgage is underwater—i.e., you owe more on the loan than the current value of the house.
  • You have not made any late mortgage payments within the last 12 months.
  • You have not been through a bankruptcy or foreclosure in the last 24 months.
  • Your current interest rate is at least 5.25%
  • The refinance would reduce your interest rate by ¼ of a percentage point or your monthly payment by at least $100.
  • Your mortgage is not a manufactured home loan, and it is not insured by the Federal Housing Administration (FHA) or the Veterans’ Administration (VA).
  • There are no restrictions on when your mortgage was made – could be any date.

Process

  • The participating banks (BoA, JPMorgan Chase, Citibank, Wells Fargo, and Ally Financial) are required to notify eligible borrowers of the availability of the refinance program, but borrowers may also contact the banks directly for information.
  • The application process has yet to be determined.

Scenario 3: You’re late on your mortgage or at imminent risk of missing payments.

Potential Benefits

  • Loan modification. You may have opportunity to receive a loan modification with a principal write-down (i.e., a reduction in the amount you owe) that would reduce your monthly payments.
  • Forbearance. If you are unemployed, you may have an opportunity to get mortgage payment forbearance (the lender will delay foreclosure and offer a plan for allowing you to catch up on payments).
  • Short sale. You may have the opportunity to have the bank facilitate a short sale (i.e., you would sell your property for less than the amount of the mortgage to avoid a foreclosure).
  • Deed in lieu. You may have an opportunity to proceed with a “deed in lieu of foreclosure” (i.e., you give the lender all legal rights to the property in exchange for its agreement not to pursue foreclosure formally).
  • Relocation assistance. You may be able to get funds to help pay relocation expenses following a foreclosure.
  • Relief from further financial obligations after home sale. You may have an opportunity to receive relief from paying some or all of the amounts that might still be legally owed on the mortgage loan following a foreclosure sale or short sale.

Preliminary Checklist for Eligibility

  • You own and occupy your property, and your property has no more than four separate units.
  • Your mortgage is serviced or owned by Bank of America, JPMorgan Chase, Citibank, Wells Fargo or Ally Financial (formerly GMAC).
  • Mortgages owned by Fannie Mae or Freddie Mac are not eligible. To see if your loan is owned by Fannie or Freddie, go here.
  • There are no restrictions on when your mortgage was made – could be any date.

Process

  • You may be contacted directly by one of the five participating mortgage servicers, but you should also contact your servicer to request consideration for the range of options that might be available to you.
  • You may want to consult a HUD-certified housing counselor for assistance.
  • Some details of the process are yet to be determined.

WHAT ABOUT THE INDEPENDENT FORECLOSURE REVIEW?

The Office of the Comptroller of the Currency and the Federal Reserve Board are overseeing an Independent Foreclosure Review. This is a separate effort from the National Mortgage Settlement. This initiative could result in cash payouts to borrowers who suffered financial harm due to improper foreclosures.

Potential Benefits

You may be eligible to receive cash remedies if the Review shows (1) your loan was serviced by one of the banks or companies listed below, and if (2) if you suffered financial harm due to errors, misrepresentations or other deficiencies in the foreclosure process. If you are a candidate for this benefit, you must apply and submit paperwork to participate in the Review. Deadline for submitting a request for review is December 31, 2012.

Basic Eligibility

  1. You were in any stage of the foreclosure process on a home that was your primary residence from January 1, 2009 to December 31, 2010.
  2. Your mortgage servicer (the company that received your mortgage payments) was one of these businesses:
  • America’s Servicing Company
  • Countrywide
  • National City
  • Aurora Loan Services
  • EMC
  • PNC
  • BAC Home Loans Servicing
  • Everbank/Everhome
  • Sovereign Bank
  • Bank of America
  • Financial Freedom
  • SunTrust Mortgage
  • Beneficial
  • GMAC Mortgage
  • U.S. Bank
  • Chase
  • HFC
  • Wachovia
  • Citibank
  • HSBC
  • Washington Mutual
  • CitiFinancial
  • IndyMac Mortgage Services
  • Wells Fargo
  • CitiMortgage
  • Metlife Bank
  • Wilshire Credit

Find Out More about the Independent Foreclosure Review

Answers to questions about the process and borrower eligibility are available at (888) 952-9105, Monday through Friday from 8 a.m. to 10 p.m. (ET), and Saturday from 8 a.m. to 5 p.m. (ET). You can also get more information about the review at the website.

Click here to see Frequently Asked Questions and Answers.

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Fannie Mae Retires Payment Reduction Plan Program

November 1, 2010

On October 29, 2010, Fannie Mae issued Announcement SVC-2010-16 to servicers stating they are retiring the Payment Reduction Plan (PRP) program effective December 31, 2010.

The PRP program, introduced in 2009, was designed to provide borrowers ineligible for the Home Affordable Modification Program (HAMP) with temporary payment relief while the servicer and borrower worked together to find an appropriate permanent foreclosure prevention solution.

Under the program, a homeowner’s mortgage payments can be reduced up to 30% of the contractual monthly payments of principal and interest. The program covers owner occupied properties, as well as investment properties and second homes.

According to the Announcement, all PRPs must be initiated on or before that date and must end by July 1, 2011, or within 6 months of commencement, if earlier.

Servicers must continue to report PRP data on a monthly basis in the HomeSavers Solution® Network. Servicer incentives will continue to be paid on eligible PRPs upon the successful completion of a permanent foreclosure prevention alternative.

A spokesperson for Fannie said recent volumes in the program were relatively small, and borrowers experiencing hardships such unemployment and problematic drywall, can still be put into regular forbearance plans and extensions.

Servicers should continue to use other foreclosure prevention options available, as indicated in the Servicing Guide, Part VII, Chapter 6: Foreclosure Prevention Alternatives, and as updated by subsequent announcements.



Home Affordable Refinance FAQs

June 5, 2009

interest-rates-low

I’m current on my mortgage. Will the Home Affordable Refinance help me?

Eligible borrowers who are current on their mortgages but have been unable to take advantage of today’s lower interest rates because their homes have decreased in value, may now have the opportunity to refinance. Through the Home Affordable Refinance Program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they own or that they placed in mortgage backed securities.

How do I know if the refinance will improve the long term affordability or stability of my loan?

Your lender will give you a “Good Faith Estimate” that includes your new interest rate, mortgage payment and the amount you will pay over the life of the loan. Compare this to your current loan terms. If it is not an improvement, refinancing may not be right for you. Also consider that refinancing from an adjustable rate to a fixed rate loan or eliminating higher risk loan terms such as interest only payments or balloon payments may also provide long term stability.

I owe more than my property is worth. Do I still qualify to refinance under the Making Home Affordable Program?

Eligible loans will include those where the first mortgage will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less on your first mortgage you may qualify. The current value of your property will be determined after you apply to refinance.

I have both a first and a second mortgage. Do I still qualify to refinance under Making Home Affordable?

As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible for a Home Affordable Refinance. Your eligibility will depend, in part, on agreement by the lender that has your second mortgage remain in a second position, and on your ability to meet the new payment terms on the first mortgage.

Will refinancing lower my payments?

The objective of the Home Affordable Refinance is to provide creditworthy borrowers who have shown a commitment to paying their mortgage, the opportunity to get into a mortgage with payments that are affordable today and sustainable for the life of the loan. Borrowers whose mortgage interest rates are much higher than the current market rate should see an immediate reduction in their payments.

Borrowers who are paying interest only, or who have a low introductory rate that will increase in the future, may not see their current payment go down if they refinance to a fixed rate and payment. However, these borrowers could save a great deal over the life of the loan by avoiding future mortgage payment increases. When you submit a loan application, your lender will give you a “Good Faith Estimate” that includes your new interest rate, mortgage payment and the amount that you will pay over the life of the loan. Compare this to your current loan terms. If it is not an improvement, a refinancing may not be right for you.

What are the interest rate and other terms of this refinance offer?

The rate will be based on market rates in effect at the time of the refinance and any associated points and fees quoted by the lender. Interest rates may vary across lenders and over time as market rates adjust. The refinanced loans will have no prepayment penalties or balloon payments.

Will refinancing reduce the amount that I owe on my loan?

No. The objective of the Home Affordable Refinance is to help borrowers get into more affordable loans. Refinancing will not reduce the principal amount you owe to the first mortgage holder or any other debt you owe. However, refinancing should save you money by reducing the amount of interest that you pay over the life of the loan.

Can I get cash out to pay other debts?

No. However, borrowers whose loans are owned or securitized by Fannie Mae may be eligible to finance all closing costs and obtain a small amount of cash (2% of the mortgage amount not to exceed $2,000) through the refinance if there is sufficient equity. For borrowers whose loans are owned or securitized by Freddie Mac, transaction costs (not to exceed $2,500) such as the cost of an appraisal or title report, may be included in the refinanced amount.

I am delinquent on my mortgage. Will I qualify for a Home Affordable Refinance?

No. Borrowers who are currently delinquent or have been 30 days overdue more than once during the past 12 months will not qualify. You should contact your servicer to see if a Home Affordable Modification is an option for you.

Will I need mortgage insurance?

If your existing loan has private mortgage insurance, you will need the same amount of insurance coverage for the refinanced loan. If your existing loan does not have private mortgage insurance it will not be required as part of the Home Affordable Refinance.

How long will the Home Affordable Refinance be available?

The program expires on June 10, 2010. Your refinance transaction must be closed and funded on or before that date.


Understanding the Terms Used in Foreclosure

May 1, 2009

 

If you are working with your lender to keep your home, known as retention, there are several options:

  • Reinstatement: Your lender may agree to let you pay the total amount you are behind, in a lump sum payment and by a specific date. This is often combined with forbearance when you can show that funds from a bonus, tax refund, or other source will become available at a specific time in the future. Be aware that there may be late fees and other costs associated with a reinstatement plan.
  • Forbearance: Your lender may offer a temporary reduction or suspension of your mortgage payments while you get back on your feet. Forbearance is often combined with a reinstatement or a repayment plan to pay off the missed or reduced mortgage payments.
  • Repayment Plan: This is an agreement that gives you a fixed amount of time to repay the amount you are behind by combining a portion of what is past due with your regular monthly payment. At the end of the repayment period you have gradually paid back the amount of your mortgage that was delinquent.
  • Loan Modification: This is a written agreement between you and your mortgage company that permanently changes one or more of the original terms of your note to make the payments more affordable.

If you and your lender agree that you cannot keep your home, there are a number of liquidation terms you should understand:

  • Short Sale: Nothing more than when a lender is willing to accept less than what is owed on outstanding debts against real property. A short sale is a way for a homeowner to avoid foreclosure and still be able to pay off the bank from acceptance or a settlement agreement.
  • Deed-in-lieu of Foreclosure: A cancellation of your mortgage if you voluntarily transfer title of your property to your mortgage company. Usually, you must try to sell your home for its fair market value (FMV) for at least 90 days before a mortgage company will consider this option. A deed-in-lieu of foreclosure may not be an option if there are other liens on the property, such as second mortgages, judgments from creditors, or tax liens.
  • Assumption: An assumption permits a qualified buyer to take over your mortgage debt and make the mortgage payments, even if the mortgage is non-assumable. As a result, you may be able to sell your property and avoid foreclosure.

The Homeowner Affordability & Stability Plan FAQs

February 26, 2009

The Homeowner Affordability and Stability Plan is part of the President’s broad, comprehensive strategy to get the economy back on track. The plan is suppose to help up to 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure. In doing so, the plan not only helps responsible homeowners on the verge of defaulting, but prevents neighborhoods and communities from being pulled over the edge too, as defaults and foreclosures contribute to falling home values, failing local businesses, and lost jobs.

More information can be found on the example sheet which will show you what options might be available to you, depending on the circumstances of your mortgage.

Disclaimer: This post is adapted from Treas.gov. We do not own this information. It is made available freely to the public. It is recommended that you consult a professional for loan advice.

Borrowers Who Are Current on Their Mortgage:

What help is available  for borrowers who stay current on their mortgage payments but have seen their homes decrease in value?

Under the Homeowner Affordability & Stability Plan, eligible borrowers who stay current on their mortgages but have been unable to refinance to lower interest rates because their homes have decreased in value, may now have the opportunity to refinance into a 30 or 15-year, fixed rate loan. Through the program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they hold in their portfolios or that they placed in mortgage backed securities.

I owe more than my property is worth, do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

Eligible loans will now include those where the first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000or less you may qualify. The current value of your property will be determined after you apply to refinance.

How do I know if I am eligible?

Complete eligibility details will be announced on March 4, 2009 when the program starts. The criteria for eligibility will include having sufficient income to make the new payment and an acceptable mortgage payment history.  The program is limited to loans held or securitized by Fannie Mae or Freddie Mac.

I have both a first and second mortgage. Do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible to refinance under the Homeowner Affordability and Stability Plan. Your eligibility will depend, in part, on agreement by the lender that has your second mortgage to remain in a second position, and on your ability to meet the new payment terms on the first mortgage.

Will refinancing lower my payments?

The objective of the Homeowner Affordability and Stability Plan is to provide creditworthy borrowers who have shown a commitment to paying their mortgage with affordable payments that are sustainable for the life of the loan. Borrowers whose mortgage interest rates are much higher than the current market value should see an immediate reduction in their payments. Borrowers who are paying interest only, or who have a low introductory rate that will increase in the future, may not see their current payment go down if they refinance to a fixed rate. These borrowers, however, could save a great deal over the life of the loan. When you submit a loan application, your lender will give you a “Good Faith Estimate” that includes your new interest rate, mortgage payment, and the amount that you will pay over the life of the loan. Compare this to your current loan terms. If it is not an improvement, a refinancing option may not be right for you.

What are the interest rate and other terms of this refinance offer?

The objective of the Homeowner Affordability and Stability Plan is to provide borrowers with a safe loan program with a fixed, affordable payment. All loans refinanced under the plan will have a 30 or 15-year term with a fixed interest rate. The rate will be based on market rates in effect at the time of the refinance and any associated points and fees quoted by the lender. Interest rates may vary across lenders and over time as market rates adjust. The refinanced loans will have no prepayment penalties or balloon notes.

Will refinancing reduce the amount I owe on my loan?

No. The objective of the Homeowner Affordability and Stability Plan is to help borrowers refinance into safer, more affordable fixed rate loans. Refinancing will not reduce the amount you owe to the first mortgage holder or any other debt you owe. However, by reducing the interest rate, refinancing should save you money by reducing the amount of interest that you repay over the life of the loan.

How do I know if my loan is owned or has been securitized by Fannie Mae or Freddie Mac?

To determine if your loaned is owned or has been securitized by Fannie Mae or Freddie Mac and is eligible to be refinanced, you should contact your mortgage lender after March 4, 2009.

When can I apply?

Mortgage lenders will begin accepting applications after the details of the program are announced on March 4, 2009.

What should I do in the meantime?

You should gather the information that you will need to provide your lender after March 4, 2009 when the refinance program becomes available. The includes:

  • information about the gross monthly income of all borrowers including your most recent pay stubs if you receive them or documentation of income you receive from other sources
  • your most recent income tax return
  • information about any second mortgage on the house
  • payments on each of your each credit cards if you are carrying balances from month to month
  • payments on other loans (i.e. student loans, car loans, etc.)

Borrowers Who Are at Risk of Foreclosure:   

What help is available for borrowers who are at risk of foreclosure either because their they are behind on their mortgage or are struggling to make the payments?

The Homeowner Affordability and Stability Plan offers help to borrowers who are already behind on their mortgage payments or who are struggling to keep their loans current. By providing mortgage lenders with financial incentives o modify existing first mortgages, the Treasury hopes to help as many as 3 to 4 million homeowners avoid foreclosure regardless of who owns or services the mortgage.

Do I need to be behind on my mortgage payments to be eligible for modification?

No. Borrowers who are struggling to stay current on their mortgage payments may be eligible if their income is not sufficient to continue to make their mortgage payments and they are at risk of imminent default. This may be due to several factors, such as loss of income, a significant increase in expenses, or an interest rate that will reset to an unaffordable level.

How do I know if I qualify for payment reduction under the Homeowner Affordability and Stability Plan?

In general, you may qualify for a mortgage modification if (a) you occupy your house as your primary residence; (b) your monthly mortgage payment is greater than 31% of your monthly gross income;  and (c) your loan is not large enough to exceed current Fannie Mae and Freddie Mac loan limits. Final eligibility will be determined by your mortgage lender based on the y0ur financial situation and detailed guidelines that will be available March 4, 2009.

I don’t live in the house that secures the mortgage I’d like to modify. Is this mortgage eligible for the Homeowner Affordability and Stability Plan?

No. For example, if you own a house that you use as a vacation home or that you rent out to tenants, the mortgage on the house is not eligible. If you used to live in the home but you moved out, the mortgage is not eligible. Only the mortgage on your primary residence is eligible. The mortgage lender will check to see if the dwelling is your primary residence.

I have a mortgage on a duplex. I live in one unit and rent the other. Will I still be eligible?

Yes. Mortgages on 2, 3, and 4 unit properties are eligible as long as you live in one unit as your primary residence.

I have two mortgages. Will the Homeowner Affordability and Stability Plan reduce the payments on both?

Only the first mortgage is eligible for modification.

I owe more than my house is worth. Will the Homeowner Affordability and Stability Plan reduce what I owe?

The primary objective of the Homeowner Affordability and Stability Plan is to help borrowers avoid foreclosure by modifying troubled loans to achieve a payment the borrower can afford. Lenders are likely to lower payments mainly by reducing loan interest rates. However, the program offers incentives for principal reductions and, at your lender’s discretion, modifications may include upfront reductions of your loan principal.  

I heard the government was providing a financial incentive to borrowers. Is that true?

Yes. To encourage borrowers who work hard to retain homeownership, the Homeowner Affordability and Stability Plan provides incentive payments as a borrower makes timely payments on the modified loan. The incentive will accrue on a monthly basis and will be applied directly to reduce your mortgage debt. Borrowers who pay on time for 5 years can have up to $5,000 applied to reduce their debt by the end of that period.

How much will a modification cost me?

There is no cost to borrowers for a modification under the Homeowner Affordability and Stability Plan. If you wish to get assistance from a HUD-approved housing counseling agency or are referred to a counselor as a condition of the modification, you will not be charged a fee.

Is my lender required to modify the loan?

No. Mortgage lenders participate in the program on a voluntary basis and loans are evaluated for modification on a case-by-case basis. But the government is offering substantial incentives and it is expected that most major lenders will participate.

I’m already working with my lender/housing counselor on a loan workout. Can I still be considered for the Homeowner Affordability and Stability Plan?

Ask your lender or counselor to be considered under the Homeowner Affordability and Stability Plan.

How do I apply for a modification under the Homeowner Affordability and Stability Plan?

You may not need to do anything at this time.  Most mortgage lenders will evaluate loans in their portfolio to identify borrowers who may meet the eligibility criteria. After March 4, 2009, they will send letters to potentially eligible homeowners, a process that may take several weeks. If you think you qualify for a modification and do not receive a letter within several weeks, contact your mortgage servicer or a HUD-approved housing counselor. Please be aware that servicers and counseling agencies are expected to receive an extraordinary number of calls about this program.

What should I do in the meantime?

You should gather the information that you will need to provide to your lender on or after March 4, 2009, when the modification program becomes available. The includes:

  • information about your gross monthly income of your household including any recent pay stubs if you receive them or documentation of income you receive from other sources
  • your most recent tax return
  • information about any second mortgage on the house
  • payments on each of your credit cards if you are carrying balances from month to month
  • payments on other loans (i.e. student loans, car loans, etc.) 

My loan is scheduled for foreclosure soon. What should I do?

Contact your mortgage servicer or credit counselor. Many mortgage lenders have expressed their intention to postpone foreclosure sales on all mortgages that may qualify for the modification in order to allow sufficient time to evaluate the borrower’s eligibility.  We support this effort.


Mortgage Forgiveness Debt Relief Act FAQs

January 18, 2009

faqs

Per the IRS, if you owe a debt to somone else and they cancel or forgive your debt, the cancelled amount may be taxable.

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as, debt forgiven, in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calender years 2007 – 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). This exclusion does not apply if the discharge is due to services performed by the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.

Disclaimer: This article is adapted from IRS.gov. We do not own this information. It is made available freely to the public. It is recommended that you consult a tax attorney or tax accountant for tax advice.

The following are the most frequently asked questions and answers about the Mortgage Forgiveness Debt Relief Act and debt cancellation:

What is cancellation of debt?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example: You borrow $100,000 and default on the loan after paying back $20,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $80,000, which is generally taxable income to you.

Is cancellation of debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable income involve:

  • Qualified principal residence: This is an exception created by the Mortgage Forgiveness Debt Relief Act of 2007 and applies to most homeowners.
  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt  may not be taxable income to you. You are insolvent when your total debts are more than the fair market value of your total assets.
  • Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was farming, and the loan owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
  • Non-recourse loans: A non-recourse loan is a loan for which the lenders only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

These exceptions are discussed in detail in Publication 4681.

What is the Mortgage Forgiveness Debt Relief Act of 2007?

 The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on Dec. 20, 2007 (see news release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does exclusion of income mean?

Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as, mortgage debt forgiven in connection with a foreclosure, qualifies for relief.

Does the Mortgage Forgiveness Debt Relief Act apply to all debt incurred to refinance a home?

Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

How long is this special relief in effect?

It applies to qualified principal residence indebtedness forgiven in calendar years 2007- 2012.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?

There is no dollar amount if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.

If the forgiven debt is excluded from income, do I have to report it on my tax return?

Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

Do I have to complete the entire Form 982?

No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach Form 982 to your tax return.

Where can I get this form?

You can download and save the form to your computer, use your tax-preparation software, or use your tax accountant.

How do I know out how much debt was forgiven?

Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

Can I exclude debt forgiven on my second home?

Not under this provision. Only cancelled debt used to buy, build, or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for further details.

If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?

Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not actually required to include the forgiven debts in income to the extent that you are insolvent. You are insolvent when your total liabilties exceed your total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. Publication 4681 discusses each of these exceptions and includes examples.

I lost money on the foreclosure of my home. Can I claim a loss on my tax return?

No. Losses from sale or foreclosure of personal property are not deductible.

If I sold my home at a loss and the remaining loan is forgiven, does this constitute a cancellation of debt?

Yes. To the extent that a loan from a lender is not fully satisfied and a lender cancels the unsatisfied debt, you have cancellation of indebtedness income. If the amount forgiven or canceled is $600 or more, the lender must generally issue Form 1099-C, Cancellation of Debt, showing the amount of debt canceled. However, you may be able to exclude part or all of this income if the debt was qualified principal residence indebtedness, you were insolvent immediately before the discharge, or if the debt was cancelled in a Title 11 bankruptcy case. An exclusion is also available for the cancellation of certain non-business debts of a qualified individual as a result of a disaster in a Midwestern disaster area. See Form 982 for details.

If the remaining balance owed on my mortgage loan that I was personally liable for was cancelled after my foreclosure, may I still exclude the cancelled debt from income under the qualified principal residence exclusion, even though I no longer own my residence?

Yes, as long as the cancelled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossession, and Abandonments.

Will I receive notification of cancellation of debt from my lender?

Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form.

What if I disagree with the amount in box 2?

Contact your lender to work out any discrepancies and have the lender issue a corrected Form 1099-C.

How do I report the forgiveness of debt that is excluded from gross income?

  1. Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082, Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income on line 2. Any remaining cancelled debt must be included as income on your tax return.
  2. File Form 982 with your tax return.

How do I know if I was insolvent?

You are insolvent when you total debts exceed the fair market value of all your assets. Assets include everything you own (e.g. car, house, condo, furniture, life insurance policies, stocks and other investments, pension or other retirement accounts).

How should I report the information and items needed to prove insolvency?

Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082, Basis Adjustment) to exclude cancelled debt from income to the extent you were insolvent immediately before cancellation. You were insolvent to the extent that your total liabilities exceeded the fair market value of your assets immediately before the cancellation.

To claim this exclusion, you must attach Form 982 to your income tax return. Check box 1b on Form 982, and, on line 2, include the smaller of the amount of the debt cancelled or the amount by which you were insolvent immediately prior to the cancellation. You must also reduce your tax attributes in Part II of Form 982.

Are there any publications I can read for more information?

Yes,

  1. Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) is new and addresses in a single document the tax consequences of cancellation of debt issues.
  2. See the IRS news release IR-2008-17 with additional questions and answers on IRS.gov

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