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Bankruptcy may be an option for struggling homeowners

Some homeowners in Virginia may find themselves facing a hefty bill after losing a tax break on forgiven mortgage debt. When a home is foreclosed upon or short sold, a portion of mortgage debt is also forgiven. For 10 years, people could exclude up to $2 million of forgiven mortgage debt from their taxable income. As a result, people who were already facing financial hard times could avoid even more debt for an unrepayable mortgage. However, this tax break was temporary, and it expired at the end of 2017. As a result, people with this kind of forgiven mortgage debt may be looking at a high tax burden.

Personal bankruptcy may provide one option for homeowners seeking to escape a massive tax bill that they cannot afford to pay. To take advantage of this option, people would usually need to file for bankruptcy before their taxes are assessed. It is much more complicated to forgive tax debts in bankruptcy than other types of bills like credit card debts, medical bills and car loans. Some advocates are urging Congress to extend the tax break to avoid unnecessary bankruptcies.

Some have given less attention to this tax break because of the general revival in the U.S. housing market in the decade following the financial crisis of 2008. Still, every year, some homeowners face serious difficulties paying their mortgages, especially after a job loss or disability. A short sale or foreclosure may bring the mortgage to an end, but the lack of a tax break may compound financial problems for people already facing hard times.

When people are unable to pay their bills, they may face escalating stress, collection calls and even lawsuits. A bankruptcy attorney can provide guidance and advice on Chapter 7 as a mechanism for debt relief.

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Bristle & Yi Law, PLLC
9200 Church Street
Suite 202
Manassas, VA 20110

Phone: 703-278-2027
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