Help From the IRS for Struggling Home Owners

Many years ago I was doing a tax return for a couple who had had quite a few major financial setbacks the previous year.  They had just barely managed to stay in their home.  They had avoided foreclosure because their lender was willing to work with them.  Their loan had been totally redone and the lender had “forgiven” $25,000 of the debt.  This meant the couple was able to make the payments on their new, smaller loan.  After a difficult year financially, they were looking forward to getting a refund when they did their taxes.  They were going to use the money to pay off a few credit cards they still owed on.

It was my difficult job to tell them, that in the eyes of the IRS, debt forgiveness is taxable income.  When you have a loan for $200,000 and the lender lowers that to $175,000, the IRS treats that as income. From their perspective, it is just the same as earning $25,000 and using it to pay down your debt.  My clients were very unhappy when I told them, that only were they not going to get a refund, they now owed the IRS several thousand dollars because of their debt forgiveness.  Talk about kicking someone when they are down!

With the current mortgage crisis, many lenders are working with mortgage holders to restructure loans, and they are forgiving  part of the principal due.  It this housing market it can make a lot of sense. It is better to lose some debt repayment, then to foreclose and get stuck with a house the bank can’t sell.

The IRS has decided to help out homeowners, and for tax years 2007, 2008, and 2009, homeowners will not be required to pay taxes on certain debt forgiveness on mortgages.  If you think this will apply to you, make sure to talk with your tax preparer.  Certain forms must be filled out, and not all home debt will qualify.

Here are some more details from the IRS.

There is now tax relief for struggling homeowners. If your mortgage debt is partly or entirely forgiven during 2007, 2008 or 2009 you may be able to claim special tax relief by filling out Form 982 and attaching it to your federal income tax return for that year.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from tax up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return.

Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. The debt must have been used to buy, build or substantially improve your 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.

If your debt is reduced or eliminated you will receive a year-end statement (Form 1099-C) from your lender. 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. You should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for your home (Box 7).

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit the IRS Web site at A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. This publication and Form 982 can be downloaded from or by calling 800-TAX-FORM (800-829-3676).

Remember that for the genuine IRS Web site be sure to use .gov. Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is


Debt Free Forever – The Credit Card Pay Off Plan

This is the third post in a series that will explore how you can become debt free, and stay debt free forever. Future posts will talk about when you should and should not use credit cards for purchases. Why you should care about your credit score, how to save money on every day expenses, will credit repair companies help you or hurt you and much more. Make sure to subscribe to our feed so you don’t miss a single installment of this series.

Make sure you have read parts one and two of the series before reading this.  You also need to have done the previous assignments before you can start paying off your debt.

Now, in part 2 you filled out a worksheet that listed all your credit cards, the amount you owed, the minimum payments on your credit card, and the amount you are actually paying.   Hopefully you are paying more than your total minimum payments each month. If you are paying only your minimum payments, or if you are not even paying your minimum payment, we will need to get into some advanced strategies. I’ll save those for the next post.  But I have found that most people who want to pay off their credit cards,  pay more than their minimum payment each month, sometimes quite a bit more! But this can cause problems.

Continue reading “Debt Free Forever – The Credit Card Pay Off Plan”

Debt Free Forever – Adding Up The Debt

This is the second post in a series that will explore how you can become debt free, and stay debt free forever. Future posts will talk about when you should and should not use credit cards for purchases. Why you should care about your credit score, how to save money on every day expenses, will credit repair companies help you or hurt you and much more. Make sure to subscribe to our feed so you don’t miss a single installment of this series.

I hope you have read the first post and have made your commitment to become debt free forever. Last time we talked about the problem of debt, and of the fact that most people do not get an adequate financial education. With this post we are going to start into the real work of becoming debt free forever. And the best place to start is with credit card debt.

Credit cards are easy to obtain and easy to use. In fact, most stores will give you a discount on your purchase if you will sign up and/or use the store credit card. Why is that? Because they know that you will probably not pay off your purchases every month, and that they will earn more from you in interest charges and fees than the discount that you get.

It is interesting to see just how much a purchase made on a credit card can end up costing you. Let’s look at an extreme example.

Continue reading “Debt Free Forever – Adding Up The Debt”

How To Get Out of Debt and Become Debt Free Forever

Table of contents for Debt Free Forever

  1. How To Get Out of Debt and Become Debt Free Forever
  2. Debt Free Forever – Adding Up The Debt
  3. Debt Free Forever – The Credit Card Pay Off Plan
  4. How To Get Out of Debt – Debt Free Forever

This is the first post in a series that will explore how you can become debt free, and stay debt free forever. Future posts will talk about when you should and should not use credit cards for purchases. Why you should care about your credit score, how to save money on every day expenses, will credit repair companies help you or hurt you and much more. Make sure to subscribe to our feed so you don’t miss a single installment of this series.

The United States is in a debt crisis. A 2.57 trillion dollar crisis in 2007 according to the Federal Reserve. The average American household caries $8,565 in credit card debt. What makes this particularly scary is that many consumers are not getting over the heads in debt from frivolous spending. As salaries and wages haven’t kept up with rising costs, consumers are turning to their credit cards to make ends meet.

Many people are aware of the problem and would like to become debt free. But they don’t know how. Schools don’t teach finances, and with the amazing amount of both good and bad information on the internet it is hard to know where to turn. In fact, it is easy to get ripped off and end up even worse than before.

In this series I am going to give you a basic financial education and step by step directions that will help you get debt free, and stay debt free forever. You won’t need to buy anything, you won’t need to hurt your credit rating or declare bankruptcy. Each post will talk in depth about a specific credit or money topic. Then I’ll give you an assignment to work on. Stick with me, and you will become debt free forever!

Now here is your first assignment.

Assignment One: Make a Commitment
Let me be honest. This isn’t going to be easy, and you are going to make plenty of mistakes along the way. So you need to make a commitment. A strong commitment to do what it takes, and to keep doing what it takes, until you reach your goal. So today I’d like you to set the goal of becoming debt free, with the commitment to do the assignments exactly as they are assigned. And if you make a mistake and fall off the wagon, make a commitment to get right back up, brush yourself off, and get back with the program. Making a public commitment makes you more accountable, so feel free to post here if you will work with me to become debt free forever!

Check Out The Mortgage Calculators

With all the turmoil in the mortgage markets these days I thought it would be helpful to add a page of mortgage calculators. There are 20 calculators where you can see the effects of refinancing your mortgage, or making extra payments, or even going to interest only payments.

Teach Credit…Earn Rewards

By: Tisha Kulak

It may sound harsh but many parents must think they are crazy for getting their college student a credit card. On one hand, it serves as a security blanket especially for kids traveling far to go to school. On the other hand, it seems to be the perfect recipe for disaster. Granted no parent wants to set their kid up to fail, and providing them with a credit card doesn’t necessarily need to be a set up. As long as responsible spending and budgeting is explored and discussed at great length beforehand, a student having a credit card can benefit both students and parents.

Credit cards created especially for the college crowd are many. Anyone considering such a card should obviously do their homework prior to any application and check out all the fees and requirements that go along with the card. That is obviously a crucial first step. However, sometimes the benefit programs that coincide with the card benefits are overlooked. The programs are varied but they can actually save you money depending on your spending habits and personal needs. Generally most cards designed for college students have an attractive introductory package that includes 0% financing for a specific term but look beyond the introductory period when making a choice. Read all of the fine print and see how each card compares to the others before making a commitment to one company.

In a nutshell, there simply seems to be a credit card designed for almost everyone. College students are no exception. Some of the benefits connected to a student credit card may not always applicable to every college student, so it pays to look at all of the options available. For example, a student who travels home via airlines can research cards that offer free airline miles which can be redeemed for free flights back home or back to school. Some credit cards have an on-going point reward system which can earn free gift certificates, redemption options for special events, and even cash back bonuses. It is especially important that all student-related credit cards be investigated because many are upping the ante and offering academic rewards. Students who acquire and maintain a specific GPA can earn additional credits based on their performance in school. For the most part, students need only to make purchases at common places such as bookstores, supermarkets, movie theaters, gas stations, and the like in order to earn the rewards.

Of course with the ups come the downs. Students, like many others, are often inundated with floods of pre-approval offers and marketing ploys aimed at nabbing attention for kids who are setting out on their own. However if properly utilizing common sense and practical spending habits, credit cards are not the root of all evil and do have their benefits. Researching different credit cards and the companies who sponsor them can help make more informed decisions when it comes to choosing a good credit card for the young adults going to college.

Tisha Kulak is a writer for, where she writes about student credit cards; and responsible credit card use.

Get Your Children in Debt

Rob, over at Home Business Blogger has a great post on “Get Your Children in Debt to Keep Them Out of It”. In his post he points out the importance of parents teaching their kids about debt at an early age. Today you can’t depend on the schools or anyone else to teach your kids how to handle money, it is up to the parents. But it seems many are not doing a very good job.

According to MSNBC many students are leaving college with over $10,000 in consumer debt (not including student loans), and credit scores so low that it will limit their ability to buy a home, or even rent a car. Many are putting the blame on the credit card companies for providing credit cards to students with little or no income. Some are suggesting that Congress should step in and provide oversight. I disagree. It is the responsibility of the parents to teach their children about debt, and it is the responsiblity of the adult student to manage their debt properly.

So parents, do your children a favor, and get them in debt while they are young, and before it will affect their credit score!