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Massachusetts consumers seek shorter loan terms

When Massachusetts residents face financial challenges that prevent them from paying their mortgage payments on time, they may seek means other than bankruptcy in order to stop foreclosure of their homes. Before they do so, however, they should carefully weigh all of the potential consequences of bankruptcy alternatives.

Instead of filing for bankruptcy, some people may choose to do what is called a short sale of their home. In a short sale, a debtor will sell his or her home for less than the balance of their loan on it, but will do so with the lender's blessing. The lender will take the money from the sale but then forgive the debtor the remaining balance on his or her loan.

The problem with a short sale, according to one professional, is that prior to 2007, a debtor would have to report the forgiven balance on the loan as taxable income and pay income taxes on that amount. While the 2007 Mortgage Debt Relief Act temporarily suspended this rule, that suspension is set to lapse on December 31, 2012. After that day, as it stands now debtors who participate in a short sale may have to pay substantial income taxes on forgiven debt. This professional has developed a tool to help people determine if a short sale would still be advantageous even in spite of the possible tax consequences.

Unlike a short sale, however, discharging debt in bankruptcy does not result in income tax consequences. Filing for bankruptcy may or may not stop a foreclosure (as it depends on the type of bankruptcy being filed), but it does provide tax free debt relief to a person who cannot afford to pay the balance of his or her home loan.

Source: Equities.com, "Freddie Mac short sale agent Kris Lindahl publishes information on 2007 Mortgage Debt Relief Act," Oct. 30, 2012

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