Current law relieves mortgage debtors from having to report forgiveness of mortgage debt through principal reduction as income – even if the mortgage debtor has gotten a discharge on the mortgage through bankruptcy.
However, this law expires at the end of 2012. Unless Congress extends this law, those who receive forgiveness of mortgage debt will have to report their principal reductions as income.
See IRS Publication 4681.
New guidelines effective June 1, 2010, clarify many modification issues.
First, lenders may but are not required to reduce principal balances in a modification down to 115% of the principal balance owing.
Second, lenders may not foreclose on a borrower who is in the process of modification until after the borrower is declined and other options have been considered.
Third, a borrower in bankruptcy may proceed with a modification.
Fourth, unemployed borrowers can have up to six months of reduced payments will seeking new employment.
There are many other points these guidelines clarify. Read them here or here.
Read Supplemental Directive 10-02 here, which prohibits foreclosure during the 30-day period following a modification turn down and requires that borrowers in bankruptcy be considered for modification.
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