Cancellation of Debt
The good news for homeowners with upside down mortgages or people who are behind on their mortgages and cannot afford to pay them is that there is the Mortgage Forgiveness Debt Relief Act. Your debt can be canceled by the mortgage companies and the Mortgage Forgiveness Debt Relief Act will help you. First, let us understand what it means for a debt to be canceled.
What is a Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. When you borrowed the 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 the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Example of a Cancellation of Debt
Here’s a very simplified example of how cancellation of debt works. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.
Is it likely that your debt will be canceled?
When people cannot pay their mortgage payments, they hope that their debts will be cancelled, especially when they have upside down mortgages. However, the reality is that all lenders will do anything to recoup some of the money, if not all, first. Cancelling the debts is really something that they will not do if they can help it at all.
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