Mortgage Debt Help Strategies

Debt can take many forms, including car loans, payday loans, and mortgages among others. Mortgage debt help can take several forms in today's topsy-turvy economy, ranging from doing nothing to avoid foreclosure to making the serious decision to file Chapter 7 or Chapter 13 bankruptcy. In between these two extremes, the homeowner needing mortgage debt relief may figure out a way to pay off the mortgage debt, may consolidate debts into less-expensive, more manageable payments, or may take advantage of a debt workaround, or workout, strategy.

The guiding principle for the lender agreeing to any workaround is that the arrangement will benefit the lender.

Working Around Mortgage Debt

Mortgage debt help consists of several workaround strategies that may provide mortgage debt help, depending on the financial situation of the homeowner and the value of the real estate property.

• A repayment plan is perhaps the easiest and most creditor-acceptable type of workaround strategy because the mortgage lender is assured of having the debt paid. The homeowner, who may want the assistance of a loss mitigation professional, works out a plan with the lender to pay any amount in arrears and to get back on track with regularly scheduled payments. This type of workaround requires proof of income and an adequate down payment.
• Short refinancing involves negotiating a new loan in settlement of the debt and having an investor (possibly family or friend) buy and pay off the mortgage at a discount. Often, the investor buys the property with the intent of selling it back to the original homeowner.
• In a short sale, the homeowner sells the mortgaged property to a third party and the mortgage lender accepts the sale price as full settlement of the debt.
• With a forbearance workaround, the lender stops legal action in exchange for an agreed payment or the homeowner's agreement to restore or upgrade the property. Or, the lender may not want to take possession of the property title for its own reasons and is willing to delay further action until a beneficial workaround can be arranged.
• In the deed-in-lieu-of-foreclosure workaround, the property is exchanged for forgiveness of the debt. In some situations, this workaround carries tax implications. The amount of the forgiven debt may be reported as income to the Internal Revenue Service on Form 1099-C. However, provisions of the Mortgage Debt Relief Act of 2007 may apply. Until 2012, this law excludes as taxable income the cancellation of debt on a qualified principal residence. Anyone who receives a Form 1099-C showing cancellation of debt as income needs to file the appropriate forms with their tax return.