Whether you’re on your first, second, or third mortgage, debt gathered on your home over time is often a large factor in your bankruptcy case and how you are affected after your case is finished. If you’re considering filing for Chapter 7 or Chapter 13 bankruptcy, or you’re in the process of filing, it’s important to also think about what happens to your financial situation after your case is complete. Behm Law Group, Ltd. can help you prepare for what comes ahead when you experience debt forgiveness in Mankato, MN.
When your bankruptcy case is finished and you’ve had a mortgage debt cancelled, forgiven, or reduced, there are a number of ways it can affect you when tax season comes around.
The Bad Stuff
Your mortgage debt can be forgiven in a few ways. For example, you may have restructured your mortgage or modified the payments with your mortgage lender. Unfortunately, if your mortgage debt is forgiven before you file for bankruptcy relief, you still may have to pay taxes on such forgiven mortgage debt because mortgage debt that has been cancelled or forgiven may be considered income. That means you may be paying income tax on the amount you “gained” from debt forgiveness.
The Good Stuff
Though the default for forgiven debts in your taxes is to treat them as income, there are some ways you can get out of paying that income tax. In 2007, Congress established an act that allows those with forgiven debts to avoid paying high income taxes. The two catches, however, with The Mortgage Forgiveness Debt Relief Act of 2007 are that it only covers debts gained in 2014 or earlier, and it only covers up to $2 million of a forgiven debt.
The Mortgage Forgiveness Debt Relief Act of 2007
To qualify for getting out of paying income tax on some or all of your forgiven mortgage debt under the 2007 debt relief act, your situation must meet the following stipulations:
- Your mortgage debt was forgiven within 2007 to 2014 (calendar years).
- Your forgiven debt was principally used to buy or modify your home (not a home you rent to others nor a vacation home).
- Your debt was cancelled, forgiven, or reduced because of a change with your lender, or it was cancelled through foreclosure.
- None of the money gained in a refinanced mortgage was used outside of home improvement (no outside purchases or bills).
Mortgage debts that qualify for the debt relief act of 2007 can have up to $2 million taken out of the income tax bracket. For many, this means their entire forgiven mortgage will be excluded from their taxes, making the Mortgage Forgiveness Debt Relief Act of 2007 one of the saving graces for those who have filed for bankruptcy.
For more information about debt forgiveness in Mankato, MN, and how it affects your bankruptcy and taxes, contact Behm Law Group, Ltd. at (507) 387-7200.