Presents
SHORT SALE BASICS
FOR
HOMEOWNERS
TN Short Sale Consultants, LLC
Legal Disclosure Notice The contents of this document are NOT legal advice or a substitute for legal advice. This is
information offered for informational purposes only. Please seek the assistance of a qualified legal professional for
guidance with regard to issues specific to your transactions and state law in the state and county of your residence.
Important Notice © 2009 T.S.S.C. LLC ® All Rights Reserved. All materials in this package are protected by United
States Copyright law. This material in any form, or parts thereof, may not be published, reproduced, or distributed to third
parties and/or used in any manner without the express written permission of TN Short Sale Consultants, LLC. You may
not alter or remove any trademark, copyright or other notice from copies of the content. Recipient agrees to respect and
protect the confidential information from any unauthorized persons and/or from falling into the hands of the public
domain.
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
TN Short Sale Consultants, LLC
Table of Contents
1 INTRODUCTION......................................................................................................... 3
2 PRE-FORECLOSURE HOMEOWNER OPTIONS.................................................. 4
2.1 FORBEARANCE OR WORKOUT PLAN WITH THE LENDER................. 4
2.2 LOAN MODIFICATION ..................................................................................4
2.3 BANKRUPTCY ................................................................................................ 4
2.4 DEED IN LIEU OF FORECLOSURE ..............................................................5
2.5 REFINANCE ..................................................................................................... 5
2.6 FORECLOSURE ............................................................................................... 5
2.7 SHORT SALE .................................................................................................... 5
3 SHORT SALE 101 ........................................................................................................ 6
3.1 SHORT SALE ................................................................................................. 6
4 TYPICAL 5-MONTH FORECLOSURE TIMELINE……………………………... 9
5 POSSIBLE SHORT SALE OUTCOMES ................................................................ 8
5.1 PROMISSORY NOTES ................................................................................. 8
5.2 1099C .............................................................................................................. 8
5.3 DEFICIENCY JUDGMENTS ........................................................................ 8
6 SHORT SALE RELATIONSHIP DIAGRAM ……………………........................ 10
7 SELLER’S WORK FLOW DIAGRAM ………………………............................... 11
8 FREQUENTLY ASKED QUESTIONS……….…………………………………….12
8.1 WHY IS TN SHORT SALE CONSULTANTS INVOLVED?...................... 12
8.2 HOW LONG DOES THE PROCESS TAKE?................................................12
8.3 HOW MUCH WORK DOES IT TAKE?........................................................12
8.4 DOES A SHORT SALE COST ME ANYTHING? ………………………...12
8.5 WHY PURSUE A SHORT SALE? …………………………………………12
8.6 CAN I CHOOSE MY OWN REAL ESTATE AGENT? …………………...12
8.7 I‟M READY TO GET STARTED, WHAT‟S NEXT? …………..…………..12
9 TESTIMONIALS ...........................................................................................................14
10 SHORT SALE BASICS FOR SELLERS: ACKNOWLEDGEMENT OF RECEIPT
AND UNDERSTANDING………………..………………………………………….16
Addenda……..
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
TN Short Sale Consultants, LLC
I Introduction
The following material contains basic information on the pre-foreclosure short sale process that every
homeowner and their real estate agent should know. It is a brief summary intended to inform you, the
homeowner, of your rights and options and offer you the best possible solution for your situation. Working
with TN Short Sale Consultants, LLC (T.S.S.C) will help you put those solutions in place faster.
This information is intended to provide homeowners with a working knowledge of short sales before meeting
with their real estate agent and entering into a short sale transaction. It is also a brief description of T.S.S.C‟s
short sale structure and how T.S.S.C conducts business with real estate agents and brokers. We look forward to
speaking with you further after you have reviewed this document and returned the form to our offices.
Company Address:
TN Short Sale Consultants, LLC
P.O. Box 23701
Knoxville, TN 37933
Phone: 865-851-5275 or 865-660-1203
Fax: 865-966-3273
PLEASE NOTE: Your real estate agent will be your primary contact and will have all updated
information.
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
TN Short Sale Consultants, LLC
2 Pre-foreclosure Homeowner Options
Below are the most common solutions for Homeowners who are facing foreclosure. Each homeowner has a
unique situation with various circumstances. This section provides you with a definition of the most common
solutions.
Websites and other resources that may be helpful are:
Federal Housing Administration:
http://portal.hud.gov/portal/page?_pageid=73,1828292&_dad=portal&_schema=PORTAL
Tips for Avoiding Foreclosure:
http://www.hud.gov/foreclosure/
Foreclosure Law:
http://www.foreclosurelaw.org/Tennessee_Foreclosure_Law.htm
2.1 Forbearance or Workout Plan with the Lender
Lenders will sometimes give homeowners the option of catching up missed payments by adding the amount
owed to their original monthly mortgage bill. The Homeowner must qualify for this and deliver all necessary
paperwork to the bank in order for them to approve a forbearance plan. So, as an example, a homeowner owing
$6,000 in missed payments and late charge would have to pay that amount back in addition to their normal
mortgage amount. Typically, lenders will allow up to a maximum of 18 months for the money to be paid back
to them. This always significantly increases their monthly outlay. Statistics from the mortgage banking
association show that 85% of homeowners entering a forbearance plan do not make their second payment.
2.2 Loan Modification
Another option for the homeowner to retain their home is loan modification. Loan Modification is a permanent
change in one or more of the terms of a mortgagor's loan. The change allows the loan to be reinstated and
results in a payment the mortgagor can afford. Homeowners must qualify for modification as they would
qualify for a new loan. Lenders do have HUD guidelines on how they handle the modifications.
2.3 Bankruptcy
Generally, there are two types of personal bankruptcy: Chapter 7 (liquidation of assets) or Chapter 13
(repayment plan). In either type of bankruptcy, the court appointed trustee will not have very much interest in a
property that has no equity. The bank will reaffirm its rights and continue on with the foreclosure process in the
case of a Chapter 7. In the case of a Chapter 13, the homeowner cannot miss one payment of their payment plan
or the lender can continue to pursue the foreclosure process. The vast majority of Chapter 13‟s do not make
their scheduled payments, thus frequently resulting in a double whammy on the homeowners‟ credit of a
Bankruptcy and a Foreclosure.
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
TN Short Sale Consultants, LLC
2.4 Deed in Lieu of Foreclosure
In the case when there is only one loan encumbering a property, lender(s) may contact the homeowner to have
them deed the property back to them. Some lenders will sometime even offer a little financial incentive to do so.
A deed in lieu can be a great deal for the lender as they save time on money but it is a terrible deal for the credit
conscious homeowner as their credit will show a “voluntary” foreclosure e.g. they gave up.
2.5 Refinance
This is typically the first thing that homeowners who are behind in payments do. The reality is that unless there
is a lot of equity (30% +) in the property, the chances of a homeowner getting refinanced while currently behind
in their payments are very slim.
2.6 Foreclosure
When other options are not pursed or short sales are not accomplished, the property will end up in a foreclosure.
The foreclosing lender takes possession of the property and the original mortgagor has no further rights to the
property. The mortgagor could, however, still have financial obligations to subordinate lien holders after the
foreclosure.
2.7 Short Sale
The seller can work with specialized short sale groups such as T.S.S.C who will negotiate with lender(s) for a
discount on the existing mortgage loan amount owed against the property. A Short Sale can help the seller avoid
the damage a foreclosure can inflict and jumps start their credit recovery. Other alternatives are expensive and
time-consuming; the short sale process can turn a near foreclosure into a win-win experience for all parties and
provide an avenue for the homeowner to start fresh and potentially be able to obtain another mortgage much
faster.
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
TN Short Sale Consultants, LLC
3 Short Sale 101
3.1 Short Sale
A „Short Sale‟ is in essence a discount that a mortgage lender is willing to accept off of the original balance of a
loan (mortgage) encumbering real estate. Lender(s) will typically consider a short sale on properties that have
little or no equity and are either behind in payments or in imminent danger of being behind.
In order for banks to consider a short sale, they require the same paperwork as they would if you were applying
for a loan. In addition to this, a case must be built as to why the home is not worth what is currently owed and
the documentation must prove that the sellers no longer have the capacity to afford their mortgage payments.
When lenders consider a loan applicant (when an individual wants to buy a house, or refinance) or a short sale
file (when a homeowner tries to sell their house for less than what is owed) they look at the three P‟s: Paper,
People, and Property.
People – pertains to the Homeowner that is the borrower. Here, the lender will want to evaluate what hardships
have or are about to cause the payments to be late.
Paper – pertains to the borrowers‟ credit report and the original documents signed when giving a mortgage.
Lenders must follow the guidelines on how and when these loans can be discounted. Lenders will typically pull
the sellers credit report to see what other types of credit they have taken out since the mortgage and determine if
they are current on other loans.
Property – pertains to the market value of the property which the mortgage is secured against.
The idea of the short sale is to prove to the foreclosing mortgage company that the ability to pay the mortgage
(paper) and the value (property) have been damaged enough that the seller cannot recover and subsequently
must sell the property.
It is important to keep in mind that the mortgage lender considering a short sale will always look for a “good”
Reason for Default (RFD). Loss Mitigators who work for lenders need to have a valid RFD to prove that the
homeowner is indeed facing significant hardship. One point to remember is that the RFD does not necessarily
mean that the seller needs to be late on their payments, yet. An RFD is simply the story of hardship that the
seller is facing. We have worked on a number of successful short sale transactions where the seller was not yet
late on their mortgage and still had great credit.
The Hardship Letter is a handwritten letter from the seller to their lender explaining their current financial
situation and explains their current hardship. The lenders read the hardship letter in order to find out the RFD.
The hardship letter is a very important component of the short sale package that we submit to the lender.
Foreclosures are extremely expensive for mortgage lenders. Lenders are not in the business of owning real
estate, they are in business of lending money and making interest. Federal guidelines require lenders to reserve
money for all nonperforming assets such as loans in default and foreclosures. Typically lenders would prefer to
cut their losses and take a discount rather than to continue losing money on a bad loan. On average, it costs
lenders over $60,000 per house that they repossess through foreclosure.
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
TN Short Sale Consultants, LLC
4 Typical 5-Month Foreclosure Timeline
The timeline above is a typical timeline for homeowner’s primary (non-agriculture) residence. Timeline should be
used as a guide as specific timelines may vary per lender.
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
TN Short Sale Consultants, LLC
5 Possible Short Sale Outcomes
There seems to be a lot of chatter about the negative effects of a short sale for homeowners. First, before you
can understand the outcomes, you must understand the difference between a lien release and a satisfaction.
When a homeowner purchases a property, the homeowner provides a mortgage to the Lender who then places a
lien on the property for the amount owed. The Homeowner also signs a promissory note- a promise to repay the
debt to the Lender.
In short sales, the Lender(s) has the right to one of the two things: 1. Release the lien and pursue other action to
collect the debt, or 2. Release the lien and provide a satisfaction. (Note: this is also true in a foreclosure but the
financial consequences could potentially be larger to the homeowner after a foreclosure.) In negotiating short
sales, TN Short Sale Consultants, LLC. always tries to get the Lender to lower the debt with no or minimal
consequences to the homeowner.
5.1 Promissory Notes
On rare occasions, lenders will forgive mortgage debt, but will ask for an unsecured promissory note to be
signed at closing for the amount they are still owed. T.S.S.C will always negotiate to try and get pay off at a
reduced rate. The sellers can just refuse to sign and tell the bank that it isn‟t an option they are willing to do.
However, they must note that this may result in the property not closing and greater consequences should there
be a foreclosure.
5.2 1099s
Lenders may send a 1099 on the entire amount that the Lender shows as a loss. A 1099 can be issued whether a
homeowner does a short sale or goes into foreclosures. Sellers should consult a CPA that is familiar with
1099‟s and how to handle them.
5.3 Deficiency Judgments
When a bank discounts the debt and loses money, they can pursue a deficiency judgment. In some cases,
Lender(s) will not allow the short sale without waiving their rights to a deficiency judgment; we always disclose
to the homeowner what the Lender approves. Make sure to ask your Real Estate Agent for the approval letters
from your Lender(s). These letters should also be provided from the title company at closing.
Additional Notes:
Mortgage companies can still come after the sellers for deficiency judgments even if they let the home go into
foreclosure and the property becomes a R.E.O (Real Estate Owned).
Also, mortgage companies are more likely to pursue a deficiency judgment if they suspect the seller is hiding
money and not intentionally making their mortgage payment. When T.S.S.C submits a short sale package, we
expose all of the seller‟s financial information known to the mortgage company. The mortgage company is less
likely to go after the seller if they can see that there is nothing there to pursue and has a compelling RFD.
All the above are unknown possibilities that the bank may do or threaten to do. One thing we do know for
certain is that if the seller lets the home go through the foreclosure process, the seller will have a
FORECLOSURE on their record! This is what we are trying to prevent. A foreclosure on the credit report is
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
TN Short Sale Consultants, LLC
worse than any of the possible outcomes listed above. Please keep in mind that your credit score implications
may have several variances. It is well known that if a homeowner can successfully sell their house through a
short sale, the negative implications to their credit score is substantially decreased (versus foreclosure or
bankruptcy). Your credit score will still incur some degree consequences when the short sale is reported to the
bureaus… usually with the verbiage of “settled for a lesser amount than that was owed.” Our intent with a
short sale is to equip the homeowner with the availability to rebuild their financial situation at a faster pace, in
turn, getting their lives back faster.
*Please see Addenda pages in the back of this package for additional forms and details regarding deficiencies
and tax implications.
**For even more information on deficiency judgments and 1099’s please consult IRS Pub 523, Code form 982
section 121, The Mortgage Debt Forgiveness Act H.R. 3648 as well as a CPA.
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
TN Short Sale Consultants, LLC
6 Short Sale Relationship Diagram
Below is a chart and description of how many people are typically involved in successfully getting a short sale
done. This is just an example to help you understand the complexity of the transaction and why there is a need
for experienced people working on your short sale.
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
TN Short Sale Consultants, LLC
7 Seller’s Work Flow Diagram
Short sales can take months to complete. Below is a diagram indicating the process each short sale goes
through. Each step can take a couple of weeks or only a day.
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
TN Short Sale Consultants, LLC
8 Frequently Asked Questions
8.1 Why is TN Short Sale Consultants LLC (T.S.S.C) involved?
Short sales are referred to T.S.S.C. from real estate agents and investors. T.S.S.C‟s main objective is to discount
the debt owed to the Lender(s) in order to get the property sold. T.S.S.C. consists of talented short sale
professionals with a foundation built from many years of extensive training in short sales and experience. Our
short sale experts are constantly networking with other experts in the industry to stay up to speed with the
changes in the real estate and short sale market.
8.2 How long does the process take?
The time can vary depending on the cooperation of the Homeowner and the Mortgage Lender(s). Typically,
short sales will take 3 months from the time T.S.S.C. receives the completed short sale package to the closure
date… this is according to the typical foreclosure timelines in the state of TN. It is important to be patient
during the process, keeping in mind that T.S.S.C. is working diligently to bring closure as quickly as possible.
8.3 How much work does it take for me?
Homeowner(s) involvement is needed only to carry out the following actions:
1. To obtain the required short sale documents and paperwork and give to the Real Estate Agent
2. Make the property available and presentable for showing
3. Show up at the closing provided all documents are received and Lender(s) have approved the short sale.
8.4 Does a short sale cost me any money?
T.S.S.C. services entail no upfront costs to the Homeowner and are paid at closing from the property sale
proceeds.
8.5 Why pursue a Short Sale?
A result of a successful short sale is that the homeowner can avoid a foreclosure on his/her credit report.
T.S.S.C. will get paid directly from the Lender and by sale proceeds. If the homeowner can bring his/her
mortgage loan current or sell the house without a short sale, T.S.S.C. encourages the homeowner to do so. Short
sales are used as a way to avoid foreclosure when all other alternatives have been exhausted.
8.6 Can I choose my own Real Estate Agent?
It is acceptable; however, T.S.S.C. prefers to work with Real Estate Agents who have been certified through the
T.S.S.C. Short Sale Certification Program. This ensures we‟re dealing with skilled and experienced experts in
the field of pre-foreclosure properties.
8.7 I’m ready to get started, what’s the process?
1. The agent you meet with will be your primary contact throughout the entire short sale process. He or she will
provide you with a short sale packet to complete. Carefully read the following pages and gather all the
necessary paperwork.
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
TN Short Sale Consultants, LLC
2. The agent will need to see the property and take photos to send to your Lender as well as a list of any
necessary repairs. When you meet with the agent, they will have additional paperwork for you to complete,
please work with them to get the paperwork completed as well as bring the paperwork previously requested
with you. The agent will assemble the entire package and submit to T.S.S.C. for processing.
3. Also, have a spare key ready for the agent; the agent will need the key so they can meet the appraiser your
Lender sends out to value your property. You (homeowner) will be notified before any appraisals are done.
Depending on the Lender(s) and the number of loans on the property, there may be more than one appraisal.
4. If the agent has not contacted you with in 24hours, call or email Kent Leach at 865-660-1203 or
Kent@TNShortSaleConsultants.com
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
CHECK OUT JUST A FEW TESTIMONIALS FROM HOMEOWNERS AND REAL ESTATE AGENTS THAT
HAVE GONE THROUGH THE VERY SAME PROCESS YOU ARE CONSIDERING…
"During the Spring of last year, I found myself going through a divorce... I had two kids and not enough money
to handle all of the bills that needed to be paid, including my house payment. My soon-to-be ex husband's
parents lived in Florida and knew a person there who handles short sales. This person led me to Chad Baker
and TN Short Sale Consultants. I knew we had to sell our house and quick. Chad went to work right away.
We did have several hurdles to get over during the process... dealing with the banks and with potential buyers...
but Chad never gave up and got everything worked out. After working with different buyers, getting the
foreclosure sale postponed three times, and getting the bank to reduce our payoff amount, we sold our house
and avoided foreclosure. I really appreciate all the work that Chad and TN Short Sale Consultants put into
helping me and my family. I would recommend his services, in a heartbeat, and have done so, to anyone that is
in need of an alternative to foreclosure. Thank you very much!!"
-Dione R. & Family
"After meeting with a customer regarding the potential listing of their property, it was apparent that we were
facing a very challenging situation. Their property had been on the market with another agency for one year
without a single showing, therefore, they were quite discouraged. After the owners agreed to take a reduced
price and doing extensive marketing, we received a number of showings and even a couple of offers (that were
too low for the sellers to accept). The consistent feedback was that the price was too high. I finally called TN
Short Sale Consultants for an alternative solution. They quickly went to work, negotiating with the lender for a
lower payoff amount. This allowed me to aggressively market the property at a more appropriate price and we
quickly went into contract. TSSC was extremely knowledgeable of the short sale process and their attention to
detail with negotiation, paperwork, and coordinating with my homeowners was quite impressive. They made
my clients feel at ease and were able to manage their fear and frustrations while simultaneously training me as
an agent. Because of this, I have called on TSSC‟s expertise again with other client's. I highly recommend
Chad Baker and TN Short Sale Consultants. Thanks very much!"
-Sherry S., Realtor
"I recently went through a divorce and got behind on my payments. I was trying to work with my bank but I
could not seem to make them understand my situation. They wanted their money and was not really willing to
work with me. I contacted Kent Leach and TN Short Sale Consultants and they were able to show me what
options I had if I wanted to keep my house. He told me what to say and who to talk to. Amazingly, I finally
was able to work out a plan with my bank and I was able to keep my house. I really appreciated having Kent in
my corner through all of this. Thanks TN Short Sale Consultants!!"
-Theresa R.
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
"Chad and his team were very easy to work with. I was really in a bind on a listing that I had... my homeowners
were in trouble with their mortgage and I could not get their house sold for what they needed. I called Chad and
TSSC and they were able to work with my homeowners, their lender, and get the payoff amount down to a
reasonable amount so that we could get it sold. We closed in a little over 60 days and my clients did not lose
their home to foreclosure.
Thank you."
-Kim W. , Realtor/Broker
"TN Short Sale Consultants were an extreme help in our time of need. We had a mortgage that was getting
higher and higher and we could not sell our house for the amount we needed to payoff the loan. We were about
to end up with a foreclosure on our home. They worked with our lender in ways that we didn't know how.
They got the foreclosure stopped. We stayed informed and they walked us through the entire process and took
care of all of the paperwork. We would recommend TSSC to anyone who was in the same boat we were.
Thanks for everything!"
-Tommy, Roxsanne, & Family
"I was able to sell my house and avoid foreclosure... I knew I needed out or I was going to lose it. It wasn't
until I called Chad and TSSC that I knew I had any options. He was able to put together a deal and we got it
done... at no costs at all from me. Thanks Chad."
-Barry
"Chad and Kent came to my office with a presentation on short sales... I really never thought I would use their
services. Then, one of my clients was facing foreclosure so we decided to try TSSC‟s approach. Of course, it
would always benefit my clients to get their home sold and avoid a foreclosure at all cost. Chad kept me
informed every step of the way and he made sure that everyone knew exactly what was going on. Working
with Chad and Kent on this type of sale impressed me very much and he made the process painless. In the
future, if I have clients that are looking toward foreclosure I will certainly recommend their services. This was
my first experience with a short sale and I know it definitely will not be my last one."
-Margie, Realtor
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
9 Short Sale Basics for Sellers: ACKNOWLEDGEMENT OF RECEIPT AND
UNDERSTANDING
SELLER(S) NAME(S):
________________________________________________________________________
________________________________________________________________________
ADDRESS:
_________________________________________________________________________
_________________________________________________________________________
I (We) have read the Seller Short Sale Basics document provided by TN Short Sale Consultants, LLC (T.S.S.C.)
and __________________ Realty. I have an understanding of our pre-foreclosure options and wish to pursue a
short sale.
______________________________________________________________________
Seller Signature
Seller Signature
_______________________________________________________________________
Date
Date
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TN Short Sale Consultants • P.O. Box 23701 • Knoxville TN 37933
Addendum 1
Mortgage Workouts, Now Tax-Free for Many Homeowners;
Claim Relief on Newly-Revised IRS Form
Updated with FAQs at bottom — Feb. 28, 2008
Updated with new link — Dec. 11, 2008
IR-2008-17, Feb. 12, 2008
WASHINGTON — Homeowners whose mortgage debt was partly or entirely forgiven during 2007 may be able to claim
special tax relief by filling out newly-revised Form 982 and attaching it to their 2007 federal income tax return, according
to the Internal Revenue Service.
Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007,
enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2
million or less. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its
instructions, available now on this Web site.
“The new law contains important provisions for struggling homeowners,” said Acting IRS Commissioner Linda Stiff. “We
urge people with mortgage problems to take full advantage of the valuable tax relief available.”
The late-December enactment means that reporting procedures for this law change were not incorporated into taxpreparation software or IRS forms. For that reason, people using tax software should check with their provider for
updates that include the revised Form 982. Similarly, the IRS is now updating its systems and expects to begin accepting
electronically-filed returns that include Form 982 by March 3. The paper Form 982 is now being accepted, but the IRS
reminds affected taxpayers to consider filing electronically, which greatly reduces errors and speeds refunds.
The new law applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as
mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. In most cases, eligible homeowners
only need to fill out a few lines on Form 982 (specifically, lines 1e, 2 and 10b).
The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have
been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to
the amount of the old mortgage principal, just before the refinancing.
Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new
tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be
available. See Form 982 for details.
Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. For debt
cancelled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form must
show the amount of debt forgiven and the fair market value of any property given up through foreclosure.
The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender immediately if any of the information
shown is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed
for their home ( Box 7).
Note: Legislation enacted in October 2008 extended this relief through 2012. Thus this relief now applies to debt forgiven
in calendar years 2007 through 2012.
Related Items:




Frequently asked questions on the Mortgage Forgiveness Debt Relief Act
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness
1099-C
Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments
Subscribe to IRS Newswire
**this information harvested from www.irs.gov.
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be
taxable.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the
discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well
as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of
forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does
not apply if the discharge is due to services performed for the lender or any other reason not directly
related to a decline in the home’s value or the taxpayer’s financial condition.
More information, including detailed examples can be found in Publication 4681, Canceled Debts,
Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.
The following are the most commonly asked questions and answers about The Mortgage
Forgiveness Debt Relief Act and debt cancellation:
What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you
may have to include the cancelled amount in income for tax purposes, depending on the
circumstances. When you borrowed the money you were not required to include the loan proceeds
in income because you had an obligation to repay the lender. When that obligation is subsequently
forgiven, the amount you received as loan proceeds is normally reportable as income because you
no longer have an obligation to repay the lender. The lender is usually required to report the amount
of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back
$2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt
of $8,000, which generally is taxable income to you.
Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt
income is not taxable involve:
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Qualified principal residence indebtedness: This is the exception created by the Mortgage
Debt Relief Act of 2007 and applies to most homeowners.
Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt
may not be taxable to you. You are insolvent when your total debts are more than the fair
market value of your total assets.
Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your
income from the prior three years was from farming, and the loan was owed to a person or
agency regularly engaged in lending, your cancelled debt is generally not considered taxable
income.
Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case
of default is to repossess the property being financed or used as collateral. That is, the lender
cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting
from a foreclosure does not result in cancellation of debt income. However, it may result in
other tax consequences.
These exceptions are discussed in detail in Publication 4681.
What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News
Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of
modification of the terms of the mortgage, or foreclosure on your principal residence.
What does exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax
return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain
cancelled debt on your principal residence from income. Debt reduced through mortgage
restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the
relief.
Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve
your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must
be secured by the home. This is known as qualified principal residence indebtedness. The maximum
amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if
married filing
separately.
Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal
balance of the old mortgage, immediately before the refinancing, would have qualified. For more
information, including an example, see Publication 4681.
How long is this special relief in effect?
It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through
2012.
Is there a limit on the amount of forgiven qualified principal residence indebtedness that can
be excluded from income?
The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1
million if married filing separately for the tax year), at the time the loan was forgiven. If the balance
was greater, see the instructions to Form 982 and the detailed example in Publication 4681.
If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to
your tax return.
Do I have to complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082
Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of
qualified principal residence indebtedness. If you are using the form only to report the exclusion of
forgiveness of qualified principal residence indebtedness as the result of foreclosure on your
principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home
and modification of the terms of your mortgage resulted in the forgiveness of qualified principal
residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.
Where can I get this form?
If you use a computer to fill out your return, check your tax-preparation software. You can also
download the form at IRS.gov, or call:
1-800-829-3676 . If you call to order, please allow 7-10 days for delivery.
How do I know or find out how much debt was forgiven?
Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of
debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence
indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and
10b, if applicable, on Form 982.
Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence
or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for
further details.
If part of the forgiven debt doesn't qualify for exclusion from income under this provision, is
it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not required
to include forgiven debts in income to the extent that you are insolvent. You are insolvent when
your total liabilities exceed your total assets. The forgiven debt may also qualify for exclusion if the
debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm
indebtedness or qualified real property business indebtedness. If you believe you qualify for any of
these exceptions, see the instructions for Form 982. Publication 4681 discusses each of these
exceptions and includes examples.
I lost money on the foreclosure of my home. Can I claim a loss on my tax return?
No. Losses from the sale or foreclosure of personal property are not deductible.
If I sold my home at a loss and the remaining loan is forgiven, does this constitute a
cancellation of debt?
Yes. To the extent that a loan from a lender is not fully satisfied and a lender cancels the unsatisfied
debt, you have cancellation of indebtedness income. If the amount forgiven or canceled is $600 or
more, the lender must generally issue Form 1099-C, Cancellation of Debt, showing the amount of
debt canceled. However, you may be able to exclude part or all of this income if the debt was
qualified principal residence indebtedness, you were insolvent immediately before the discharge, or
if the debt was canceled in a title 11 bankruptcy case. An exclusion is also available for the
cancellation of certain nonbusiness debts of a qualified individual as a result of a disaster in a
Midwestern disaster area. See Form 982 for details.
If the remaining balance owed on my mortgage loan that I was personally liable for was
canceled after my foreclosure, may I still exclude the canceled debt from income under the
qualified principal residence exclusion, even though I no longer own my residence?
Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2
on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and
Abandonments.
Will I receive notification of cancellation of debt from my lender?
Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt
of $600 or more. The amount cancelled will be in box 2 of the form.
What if I disagree with the amount in box 2?
Contact your lender to work out any discrepancies and have the lender issue a corrected Form
1099-C.
How do I report the forgiveness of debt that is excluded from gross income?
(1) Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to
Discharge of Indebtedness (and Section 1082 Basis Adjustment) to indicate the type of discharge of
indebtedness and enter the amount of the discharged debt excluded from gross income on line 2.
Any remaining canceled debt must be included as income on your tax return.
(2) File Form 982 with your tax return.
My student loan was cancelled; will this result in taxable income?
In some cases, yes. Your student loan cancellation will not result in taxable income if you agreed to
a loan provision requiring you to work in a certain profession for a specified period of time, and you
fulfilled this obligation.
Are there other conditions I should know about to exclude the cancellation of student debt?
Yes, your student loan must have been made by:
(a) the federal government, or a state or local government or subdivision;
(b) a tax-exempt public benefit corporation which has control of a state, county or municipal hospital
where the employees are considered public employees; or
(c) a school which has a program to encourage students to work in underserved occupations or
areas, and has an agreement with one of the above to fund the program, under the direction of a
governmental unit or a charitable or educational organization.
Can I exclude cancellation of credit card debt?
In some cases, yes. Nonbusiness credit card debt cancellation can be excluded from income if the
cancellation occurred in a title 11 bankruptcy case, or to the extent you were insolvent just before
the cancellation. See the examples in Publication 4681.
How do I know if I was insolvent?
You are insolvent when your total debts exceed the total fair market value of all of your assets.
Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance
policies, stocks, other investments, or your pension and other retirement accounts.
How should I report the information and items needed to prove insolvency?
Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082
Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent
immediately before the cancellation. You were insolvent to the extent that your liabilities exceeded
the fair market value of your assets immediately before the cancellation.
To claim this exclusion, you must attach Form 982 to your federal income tax return. Check box 1b
on Form 982, and, on line 2, include the smaller of the amount of the debt canceled or the amount
by which you were insolvent immediately prior to the cancellation. You must also reduce your tax
attributes in Part II of Form 982.
My car was repossessed and I received a 1099-C; can I exclude this amount on my tax
return?
Only if the cancellation happened in a title 11 bankruptcy case, or to the extent you were insolvent
just before the cancellation. See Publication 4681 for examples.
Are there any publications I can read for more information?
Yes.
(1) Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for
Individuals) is new and addresses in a single document the tax consequences of cancellation of
debt issues.
(2) See the IRS news release IR-2008-17 with additional questions and answers on IRS.gov.
Page Last Reviewed or Updated: May 19, 2009