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(305) 891-4055 - 25 Years of Experience,  Over 8,000 Cases Filed - Free Initial Consultation - Miami Bankruptcy Lawyer Jordan E. Bublick - 1221 Brickell Ave., Miami, Florida - Chapter 13 and 7 Bankruptcy - www.bublicklaw.com

In December, 2007, Congress passed the "Mortgage Forgiveness Debt Relief Act of 2007" to alleviate tax consequence for some homeowners in foreclosure. This act was scheduled to expire on December 31, 2012, but was subsequently extended for another year. This Act excludes from taxable gross income certain cancelled discharged debt that may otherwise arise with respect to a "qualified principal residence indebtedness."

Existing tax law provides that discharged debt, whether after a foreclosure or short sale, is generally taxable income realized in the year the debt was forgiven, unless an exception applies. Generally only reductions in principal and not forgiveness of interest results in discharge of indebtedness income ("DOI"). Usually a lender is required to issue a Form 1099-C to report the DOI to the IRS. Taxpayers are required to disclose DOI to the IRS whether the lender issues a 1099-C or not. Taxpayers may be able to exclude the DOI from income if an exceptions to DOI applies.

Exceptions

Two existing exceptions to DOI are the insolvency and bankruptcy exceptions. 26 U.S.C. section 108(d). If the borrower is insolvent, DOI is not taxable. If the debt is discharged in bankruptcy, DOI is also not taxable. Another exception is the "purchase price infirmity doctrine". This allows DOI to be excluded from income where the lender agrees to write down the purchase money debt to the true value of the collateral as the purchase price was inflated in the original transaction due to fraud or misrepresentation. Another exception from DOI is when the liability was contested. Pursuant to Zarin v. Comm'r, 916 F.2d 110 (3d Cir.1990), DOI is not income where there is a legitimate basis for the borrower to claim that the debt was never owed or collectible because illegal.

The new Act adds to the existing exceptions from DOI a category of "qualified principal residence indebtedness." Up to $2 million of indebtedness may be excluded if the reason for the discharge is either a decline in the residence's value or the taxpayer's financial condition. It should be noted that debt excluded by the Act reduces the taxpayer's basis and a "short sale" could result in a taxable "gain" which may be taxable as a capital gains.

In order for this new exception to apply, the debt must be "qualified" which includes only acquisition and not home equity indebtedness. Acquisition indebtedness includes funds borrowed to buy, construct, or improve a home. Debt consolidation loans or cash out loans are generally not acquisition indebtedness. The Act only applies to debt discharged between January 1, 2007 and December 31, 2009. Pub.L.No. 110-142 Section 2(d). If acquisition debt is refinance, the refinanced principal amount retains its status as acquisition indebtedness. The excess of the total refinanced loan amount over the refinanced acquisition indebtedness is treated as home equity indebtedness and is not eligible for exclusion from income. Acquisition indebtedness included loans to "substantially improve" the principal residence.

This new exclusion only applies if the debt was discharged due to the borrower's financial condition or a decline in the home's value. A discharged based on the lender's acknowledgment of its wrongdoing or even rescission is not eligible for the qualified principal residence exclusion. Documentationj in any litigation or settlement that one of the required grounds is the basis for the discharge of the debt would be helpful.

The homeowner must apparently elect to take either the qualified principal residental exception or the insolvency exception. The insolvency exception, if elected, is "in lieu of" the qualified principal residence excetion.Jordan E. Bublick is a Miami Bankruptcy Lawyer with over 25 years of experience in filing Chapter 13 and Chapter 7 Bankruptcy Cases and Mortgage Modifications (305) 891-4055

In the recent case of Guillermo A. Morales, Case No. 07-16284-BKC-RBR, (Bankr.S.D.Fla. January 2, 2008)(Ray, J.) the Bankruptcy Court was given the opportunity to interpret new section 222.25(4), Florida Statutes which allows a debtor to exempt personal property not to exceed $4,000 if he does not "claim or receive the benefits of a homestead exemption under s. 4, Art. X of the State Constitution." Based on the particular facts of the case, the Court held that the debtor had not proven that he had not received the "benefits" of the homestead exemption and the trustee's objection to the debtor's exemption under section 222.25(4), Florida Statutes was sustained. But the court did state that if a debtor properly abandons his entire interest in his homestead at the start of a case or and does not claim his homestead exemption or does so by proper subsequent schedule amendments, then he would be able to claim the $4,000 section 222.25(4) personal property exemption.

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In his chapter 7 schedules, the debtor listed one piece of real property with two mortgages. He did not claim the real property as exempt in his schedule C. In his original statement of intentions, the debtor set forth his intentions to reaffirm the two mortgages. Later he filed an amended statement of intentions where he indicated that his intentions were to surrender the real property to one of the mortgagees and reaffirm [sic] the other mortgage. The debtor claimed the use the $4000 personal property exemption under section 222.25(4), Florida Statutes (2007) and the trustee filed an objection to this claim of exemption.

The issue before the court was the meaning of section 222.25(4)'s phrase "receive the benefits of a homestead exemption." The trustee argued that the debtor was not eligible for the section 222.25(4) exemption as by owning a homestead, the debtor receives the benefit of the homestead exemption whether or not he makes use of it. The debtor contended that he had abandoned his interest in the real property, had not claimed it as exempt in his schedule C, and was not receiving any "benefits" of a homestead exemption.

The court looked to the language of the statute and found that it was written in the present tense. The court stated that the fact that a "debtor may have claimed or received the benefits of a homestead exemption in the past would appear to have no bearing on the application of the statute to a debtor's present situation." The court reasoned that even if a debtor had in the past received the benefits of the homestead exemption, he would qualify for the $4,000 section 222.25(4) personal property exemption if he does not claim it [the real property] as exempt and ceases to receive the benefits of a homestead exemption.

The court noted that in this case, that although debtor did not claim the homestead exemption, it was not clear whether he had derived any "benefits" from the exemption. The debtor argued that his amended statement of intentions to surrender the real property constituted an "abandonment" of the real property and that he was no longer receiving any "benefit" of the homestead exemption.

The court stated that the debtor was correct in his statement that under Florida law, abandonment of a homestead is one way that the protection of the homestead exemption may be lost. However, the court concluded that the debtor had failed to clearly indicate his intention with respect to the real property and that the court could not conclude that he had abandoned his homestead. The court noted that at the beginning of the case, the debtor had filed a statement of intentions indicating his intention to reaffirm the mortgages and retain the real property. The debtor only later changed his mind. The court also found "incompatible" with an abandonment the debtor's stated intention in his amended statement of intentions to surrender the real property to only one of the two mortgage holders and reaffirm the debt owed to the other mortgage holder.

Although the court failed to find an abandonment of the homestead in this case which led to the court's denial of the debtor's claim of exemption under section 222.25(4), the court stated that if a debtor "properly abandons his entire interest in his homestead at the start of a case and does not claim his homestead exemption" then he would be able to claim the $4,000 section 222.25(4) personal property exemption. The court even left open the possibility of a subsequent amendment of the debtor's schedules to indicate an abandonment of all interest in his homestead and to claim the $4,000 section 222.25(4) personal property exemptions.

In this case, the court found that the debtor failed to clearly indicate his intentions with respect to the real property and was denied use of the section 222.25(4) exemptions. Since the rendering of the court's decision, the debtor filed an amended statement of intentions setting forth a surrender to both mortgagees and has moved the court for a rehearing. In his motion for rehearing, the debtor refers to this amended statement of intention and points out that he did not oppose the motion for stay relief filed by one of the mortgagees.(305) 891-4055 - Jordan E. Bublick is a Miami Bankruptcy Lawyer with over 25 years of experience in filing Chapter 13 and Chapter 7 Bankrkuptcy Cases and Mortgage Modifications

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