Released July 21, 2009
URBANA, Ill. — Because having a foreclosure will remain on your credit report for seven years, you should take any measures you can to meet your mortgage payments, said a University of Illinois Extension consumer and family economics educator.
"Even if your situation looks hopeless, don't give up. Dealing with foreclosed property usually results in a significant loss for the lender, so he will probably try to help you as much as he can," said Susan Taylor.
The first thing to do is to talk to the lender and explain your situation, telling him truthfully why you're having a hard time making your payments on time. Describe your financial assets, expenses, and other debts, she said.
"If the property is sold for less than what is owed, you will still owe the difference. If there is a large enough difference, the lender's attorney will probably look for other assets that they will try to acquire to settle the debt. Or you may want to sell the property outright," she said.
Possible solutions include developing a more affordable repayment plan, temporarily suspending monthly payments or allowing you to make only interest payments, applying any prepayments you have made to the outstanding payments, referring you to a debt counseling agency, and modifying the terms of your mortgage agreement, she said.
"Any time a lender writes off a portion of a debt you owe, the lender must report it to the IRS on a Form 1099-C 1099-A—a report of miscellaneous income. This means you generally must include the written-off portion of the debt as income on your tax return the following tax year unless you are insolvent or eliminate the debt in bankruptcy," she said.
And the Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief, she said.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately), she said.
According to Taylor, the exclusion does not apply if the discharge is due to services performed for the lender or any other reason that is not directly related to a decline in the home's value or the taxpayer's financial condition. For more information, including detailed examples, consult IRS Publication 4681, "Canceled Debts, Foreclosures, Repossessions, and Abandonments," or visit http://www.irs.gov/individuals/article/0,,id=179414,00.html .
Taylor also recommends fact sheets on the topic issued by the Office of the State of Illinois Attorney General found at http://www.ag.state.il.us/consumers/homeowners_help.html.
For other good advice on getting through tough financial times, including which bill to pay first, how to talk to your creditors, how to save food dollars, how to talk to your children about your financial situation, and more, visit U of I Extension's "Getting Through Tough Financial Times" website at http://www.ToughTimes.illinois.edu.
--30—
http://www.aces.uiuc.edu/news/stories/news4845.html
Contact: Susan Taylor, (708) 720-7520, setaylor@illinois.edu
Writer: Phyllis Picklesimer, 217-244-2827, p-pickle@uiuc.edu
