Review with Your Attorney
It is important to consult with an attorney who specializes in Bankruptcy, Short Sales and Foreclosure to determine whether your mortgages (or any portion of those mortgages) are Non‐Recourse or Recourse, assess your potential liability and advise you regarding the best options for your personal situation.
In order to make your appointment with your attorney the most efficient, it is recommended that you bring the following documents with you:
- Copy of the Note for each mortgage or lien against the home in order to determine if they are Non‐Recourse or Recourse
- Documents to show any loan proceeds used in remodel or repairs
- Any correspondence from your mortgage lender(s) regarding late payments, Notice of Default or Notice of Trustee Sale
- Information from your tax advisor regarding your anticipated income tax liability
- A statement showing your HOA dues, special assessments and/or HOA liens that are outstanding (owed) and any other liens or claims
- Copy of your Financial Statement
- A detailed list of assets that are not reflected on your Financial Statement.
- Are your mortgage or mortgages (or a portion of them) Non‐Recourse or Recourse?
- If you obtained a 1st mortgage with a Home Equity Line of Credit at the same time, does the Merger of Interest Rule apply?
- Is Bankruptcy an option you should consider to keep your home or to relieve income tax, deficiency or HOA liability?
- Is a Deed in lieu of foreclosure an option or are there other options you should consider?
- What are the impacts upon your credit resulting from your selected option(s)?
- What are the civil and criminal implications of information in the Hardship Package being materially different from representations made to lender in the Loan Application?
____________________________________________________________________________
The Mortgage Forgiveness Debt Relief Act of 2007
Prior to the passage of The Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648), any portion of mortgage debt that was “forgiven” (i.e. unpaid) was treated as taxable income. The Act may save some homeowners from paying federal income taxes on forgiven debt. The requirements are very specific:
- The mortgage is on the homeowner’s primary residence. The relief does not apply to debt forgiveness on a vacation or investment home.
- Forgiveness is for the “acquisition indebtedness” of the primary residence. Acquisition indebtedness is defined as “the debt used to purchase, construct or rehabilitate the home”.
- No relief is available for refinance or the cash‐out portion of the mortgage whether the refinance or cash‐out takes the form of a refinanced first mortgage, a second mortgage, a home equity line of credit or a similar arrangement. Exception: If the cash‐out was specifically used to improve the home and the homeowner has an adequate record to prove it.
Important note: This Act may relieve these specific homeowners of their federal tax liability but may not relieve them of their state tax liability.
____________________________________________________________________________
The Conformity Act of 2010
On April 12, 2010 SB 401 the Conformity Act of 2010, was enacted in California. In general, it allows certain taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from California gross income. The new law applies to discharges of principal residence indebtedness (as defined) on or after January 1, 2009 through December 31, 2013. Whether or not you qualify can only be determined by your attorney or tax advisor.
Do not rely upon this information with respect to your situation. All interested persons must independently verify the current status and continued accuracy of the above information with their legal and/or tax counsel.
*It is important that you review these concepts with an attorney and a tax advisor regarding your individual situation.
