Foreclosures, short sales, and modifications take time. Anyone who has beat his head against the wall trying for a mortgage modification can attest that for most people, it can take many months and sometimes over a year. Foreclosures in most states take about 9 months and in the areas hardest hit by the real estate bust (Nevada, Florida, Arizona, etc) foreclosures are taking one to two years.

The Mortgage Debt Forgiveness act relates to the tax implications of forgiven mortgage debt. If your home forecloses (or you short sell), and the home is worth less than the balance due on the mortgage obligations, and the bank decides to forgive the debt, the IRS treats that amount as taxable income. So if you owe $200,000 on your home, and the bank forecloses and sells the house for $150,000, that $50,000 difference is taxable income (I know, you’re surprised). The Mortgage Debt Forgiveness Act exempts the deficiency from being taxable income if the deficiency results from a foreclosure or short sale of a primary residence between calendar years 2007 to 2012. But, banks are not required to forgive mortgage debt; in most states, banks can try to collect the balance from you.

As you can see, if you live in a state with a prolonged foreclosure cycle, you could be hit with a nasty tax bill if the foreclosure finalizes in 2013. So, if you have any inkling that you will be walking away from your home, get that process started.

Given the banks’ inherent reluctance to modify mortgages in the first place, I can certainly imagine that as the expiration date looms closer, the banks will delay modifications and start laying off the employees in those departments. So unless HAMP gets extended, there is probably only a 9 to 10 month window from today to attempt a modification. Long term, the jury is out on whether the homeowners that received modifications will ultimately avoid foreclosure or short selling their home.

However, there are still options. Bankruptcy eliminates mortgage deficiency balances; so long as you file bankruptcy in the same tax year as the foreclosure/short sale, you not only eliminate the deficiency, you eliminate its status as taxable income; you kill two birds with one stone. Also, bankruptcy can completely eliminate 2^nd mortgages and HELOC’s. Although bankruptcy cannot modify the terms of your first mortgage, bankruptcy can eliminate your other debt, possibly eliminate your 2^nd mortgage to give you the best opportunity to keep your home and financially recover.

By Matt Berkus

This is the link to the administrations effort to assist you in modifying your mortgage. Read the information on the site and follow them exactly. This is long road and can be quite frustrating. If this is your path, you must follow the guidelines. Your application will be more likely to be accepted if you rid your financial picture of the unsecured debt. File a Chapter 7 to eliminate the debt and then apply.

Beware of Foreclosure Rescue Scams – Help Is Free!

1. Beware of anyone who asks you to pay a fee in exchange for a counseling service or modification of a delinquent loan.
2. Scam artists often target homeowners who are struggling to meet their mortgage commitment or anxious to sell their homes. Recognize and avoid common scams.
3. Assistance from a HUD-approved housing counselor is FREE.•Beware of people who pressure you to sign papers immediately, or who try to convince you that they can “save” your home if you sign or transfer over the deed to your house.
4. Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
5. Never make a mortgage payment to anyone other than your mortgage company without their approval.