The Mortgage Debt Relief Act of 2007 was enacted in response to subprime mortgage relief options in the face of the early 2000s mortgage crisis. The home prices of that time were appreciating rapidly and leaders were approving borrowers who might not otherwise qualify for a mortgage with adjustable-rate mortgage solutions (otherwise known as ARMS.) The ARMS had interest rate adjustment options tied to the federal funds rate and worked well in the correct economic conditions. In 2004 & 2005, underqualified borrowing increased significantly, nearly three times the previous averages. Soon after this, home prices started to decline, and delinquency rates rose as a result. In this post, we’ll be exploring the debt forgiveness options that the Mortgage Debt Relief Act of 2007 offers.

The Act became enacted in 2007, and grants relief to homeowners who have lost their home to foreclosure, bankruptcy short sale, or debt restructuring. It offers the option of debt exclusion for any loss of the home that may be applied as income for tax purposes. It would apply to the borrower’s principal residence only and would be secured by the home. The home would have had to be the owner’s principal residence for at least two years of the past five years. Rental and income properties were excluded by the Act.

The Mortgage Debt Relief Act allows the borrower to be forgiven the amount of debt that would result from the difference between the amount owed on the property and the amount for which it was sold. That deficit could be counted as reportable income to the IRS, furthering the indebtedness of the borrower. As long as the above conditions were met, the borrower could be released from the deficit amount. Other situations where the cancellation of debt is not taxable are bankruptcy, insolvency, and non-recourse loans.

While the original Act is no longer in effect in its original form, there are portions that are still in use that have been amended by extensions. It has most recently replaced the Qualified Principal Residence Indebtedness (QPRI) exclusion by the Consolidated Appropriations Act of 2021. This Act will be in effect through 2025, bringing relief to qualifying homeowners who find themselves in difficult financial situations. The exclusion also applies to debts that were forgiven via any type of written agreement dated prior to January 1, 2026.

Things to consider when evaluating your eligibility for the QPRI exclusion include:

• The amount of money forgiven during calendar years 2007 – 2025. Depending on the amount, you may qualify.
• If a written agreement was entered into before 1/1/20216, you may qualify.
• The amount forgiven, which must be certified to have been spent on the principal home of the residence only.
• Mortgage debt that has been canceled or reduced by loan modification, short sale, or deed in lieu of foreclosure. You may qualify depending on the situation and amount.

The newly extended provisions of the Consolidated Appropriations Act of 2021 allows for cancellation of debt of up to $750,000 (or $350,000 if you are married and file separately.)

Even though this relief act may provide some solace from a precarious financial situation, it should be given serious consideration prior to entering into it. Debt forgiveness or cancellation may impact your credit score in a negative way for an extended period of time and may make it difficult to finance purchasing a home in the future. You may also be subject to certain fees, some of which may need to be resolved up front. You are required to report the forgiven debt on your tax return to the IRS, even if you qualify for the tax credit.

Because of the permanent nature of debt relief and resolution on credit reports and files, many opt for alternative solutions that may provide similar, if not the same, benefits. Simply communicating with your lender if you are unable to make payments can go a long way towards possible debt resolution. You may be able to receive extensions or alternate payment plans that are able to assist you throughout the duration of your difficulty. This can be especially true if you’ve recently suffered from a death in the family or have undergone a change of employment.

Alternatively, you may look into securing a private loan or finding a second or alternate employment option that would better suit your financial needs. In either case, there are alternative and less permanent options available to you should you need them.

If you are not qualified for the tax relief plan under Qualified Principal Residence Indebtedness, it may be that there is another exemption or exclusion that may benefit you. Contacting an attorney to guide you through available options and processes may be helpful. Conduct your own research as well, this will help you to have meaningful discussions with professionals, resulting in the best decision for you and your family. For more information, please contact us today at (801) 432-8682.