'Hidden Time Bomb' Could Leave Thousands of Homeowners with Hefty Tax Bill

We mentioned on Wednesday that one benefit of filing Chapter 7 bankruptcy is the elimination of tax liability on a mortgage deficiency. However, the Los Angeles Times reported on September 7, 2012, that many struggling homeowners could be facing a very unwelcome bill next year. When Congress passed the Mortgage Debt Forgiveness Act in 2007, the legislation forgave debt for declines in homeowner's financial conditions or drops in home values. However, the Times noted that the exemption-as much as $2 million per household in principal reduction and other aid from banks-is currently set to expire at year's end. As a result, the homeowners who obtained reductions in in their mortgage debt could receive a bill for taxes on that aid.

"The expiration of that provision is a hidden time bomb," Representative Jim McDermott told the Times.

As the Times noted, mortgage debt forgiven by a bank as part of a principal reduction, short sale or foreclosure needs to be reported as income by the homeowner and is subject to taxes. Furthermore, nearly 140,000 homeowners who received some type of relief under the $25 billion foreclosure settlement reached last year with the nation's five largest banks could also find themselves owing taxes. According to the Times, a middle-class household would owe 25 percent taxes on that relief. With the relief averaging about $76,615 for each household, the Times said the taxes would be around $19,000 for the average settlement relief so far. Additionally, the Times said the tax "would go up if the relief pushes the homeowner into a higher tax bracket or if the Bush tax cuts expire, as they are set to do at year’s end."

If you are among the thousands of Illinois homeowners who are in desperate need of foreclosure help, it is in your best interest to take action immediately. Our Chicago bankruptcy lawyers can help you determine whether Chapter 7 or Chapter 13 bankruptcy provides you and your family the most relief, and we can get started as soon as you complete the form located on this page or contact our firm at (866) 930-7482.

Benjamin Brand Services - Chicago bankruptcy attorneys

Start Your Questionnaire

How may we help you?

Schedule an appointment today.

Why Choose Us?

  • You can meet with an experienced law Partner in the Firm not some associate.
  • We concentrate in foreclosure defense and bankruptcy so we have more options to offer you then other attorneys
  • We also represent individuals in Chapter 11's that offer better loan workout and restructuring options then Chapter 13 and most bankruptcy lawyers do not know how to do it.
  • We offer a free no obligation consultation where we will discuss your option or options, tell you the pros and cons of each one, the fees and costs and help you make an informed decision. There can be more then one solution!
  • We offer affordable payment plans and fixed fees in most cases.