If you're underwater on your Orange County home, here is some news of critical importance to you:
The Mortgage Forgiveness Debt Relief Act - the one that offers homeowners a break on their taxes if they are forgiven a portion of their mortgage debt following a short sale or foreclosure - is expiring.
Orange County Foreclosure Attorney Vincent Howard wants to make you aware of this because it could have serious consequences if you default on your home after that point. Essentially, the time to work to save your home - or let it go - is now.
Some local homeowners are already acting on this, as evidenced by an Orange County Register article published in June, which detailed how a number of homeowners are strategically defaulting on their loans in an effort to beat the expiration of this law.
In a normal situation, when a mortgage lender opts to forgive either a portion or all of a borrower's debt by accepting less for the property than what is owed, that amount that is "forgiven" is marked as income by the Internal Revenue Service. What that means is you pay taxes on it.
The Debt Relief Act frees you from that responsibility. It was originally supposed to last just three years, but Democrats were able to tack it onto a larger deal that extended the Bush tax cuts another two years.
But if Congress doesn't act again soon, you will no longer have that protection as of Jan. 1, 2013.
So let's imagine you make $40,000 a year, and you have a mortgage loan on a $200,000 home that's only worth about $125,000. Even though the inflated price was not your fault, if the bank chooses to forgive that $75,000 amount. Under the Debt Relief Act, you aren't charged for that. But once the debt expires, you have to pay taxes on that amount as if it were income. Typically, that's going to be about 25 percent, which in this imaginary scenario would be about $18,750. Mind you, that's not $18,750 you even earned - and it's nearly half of your annual income. If you weren't able to keep up with your mortgage payment to begin with, chances are you don't have this much extra simply lying around.
The expiration of this measure is expected by economists to cost millions of families billions of dollars.
Keep in mind, though, if you are considering allowing your home to default, it's still worth your while to meet with a foreclosure attorney. There may be loan modification options (particularly given California's new foreclosure protection bill) that could help you significantly lower your principal payment and avoid foreclosure altogether - helping you to preserve your credit and maybe even make a profit if you choose to sell the home later. Also, a strategic default can sometimes result in the lender coming after you for the difference.
If you have put time and money into a home, it can make it all the more difficult to walk away. But again, you may not have to.
Either way, making an informed decision is key.
Orange County Foreclosure Attorney Vincent Howard at Howard Law can help. You can reach us toll-free at 1-800-872-5925 or send us a message online.