Mortgage Debt Relief Act 2014

On December 16, 2014, Congress finally passed a bill that extends the Mortgage Debt Relief Act through 2014.  This is a great law for home owners and provides a tax exemption for debt relief achieved through either short sale debt forgiveness or loan modification principle reduction.

Unfortunately, this law comes a little late in the year for most consumers.  For the past eleven months Hawaii homeowners have been forced to conclude that the Mortgage Debt Relief Act would not be extended into 2014 and have had to make loss mitigation choices with the assumption that income tax would be a (sometimes substantial) issue.  This caused at least one of my clients to be sued in a short sale cancellation and forced countless other clients to file bankruptcy to protect themselves from the potential income tax event.  At least one of my clients turned down an affordable principle-reduction loan modification, because they were concerned that they could not absorb the income tax event of the mortgage cancellation.

For the small number of consumers that gambled by closing a short sale or taking a principle reduction loan mod this year–you can crack the champagne because it appears that at least for 2014, the Mortgage Debt Relief act will extend through 2014.

Note that this recent law change does not extend the Mortgage Debt Relief Act through 2015.  This means, just as last year, anyone choosing debt relief through short sale or loan mod are risking that Congress will not extend the relief act another year.  This could result in a catastrophic income tax hit for struggling homeowners that attempt to avoid foreclosure through short sale and loan mod.

As always, it is best to seek tax advice before deciding whether these loss mitigation options are right for you.  As these decisions also raise legal issues, it is prudent to seek legal advice as well.  You can schedule a free consultation with one of our attorneys by calling 808-242-9350 x. 21 or by emailing  If you already have had your free consultation, consider scheduling a billable consult.  We bill at $250/hr.

Hopefully it will not take another eleven months for Congress to conclude that extending the Mortgage Debt Relief Act is important for stabilizing our nation’s economy.

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