On behalf of Law Offices of Mark M. Kratter, LLC on March 29, 2012
As part of a multi-state settlement with some of the biggest lenders in the nation, many Connecticut homeowners may have some amount of debt relief coming to them. Part of the settlement includes a deal to reduce the principal on many mortgages across the nation. Moreover, Bank of America also announced a separate deal to write down underwater mortgages of about 200,000 homeowners to market value. Yet mortgage modifications are not always in a homeowner's best interest, and sometimes a Chapter 13 bankruptcy may be preferable.
When a lender reduces the principal on a mortgage, that can create issues for people who have two or more mortgages on their home. That is, if a lender reduces the amount owed on the first mortgage to at or below the home's market value, then the homeowner may find him or herself on the hook for the second mortgage even if they declare bankruptcy. This is because in a bankruptcy, when the first mortgage is reduced, it may no longer be possible to wipe out the second mortgage.
However, there is an additional problem that could affect any homeowner: taxes. Under tax regulations, when a lender forgives part or even all of a loan amounting to $600 or more, then that amount must be reported as "income" to the IRS. Although there are exclusions that one may be able to qualify for, that is not always the case. Thus, a homeowner may have to pay taxes for the amount of the loan that the lender forgave.
On the other hand, debt wiped out in a Chapter 13 bankruptcy does not count as income, meaning that no taxes need to be paid on it. So in some cases, Connecticut homeowners who are eligible for mortgage relief from their lender may find that filing for bankruptcy is cheaper and more financially sound than accepting a mortgage modification. Nonetheless, the multi-state settlement reached with the nation's largest lenders should certainly prove to be of help because it is always good to have options.
Source: ABC News, "Mortgage Modifications: When to Say Yes or No," Gerri Detweiler, March 11, 2012
