March 30, 2013

Debt Forgiveness Qualifications as explained by a Miami Bankruptcy Attorney

Will Debt forgiveness encourage borrowers to stop paying Florida loans that are current? If so, this could lead to serious consequences.

With various types of debt forgiveness programs available, it may leave you wondering if it will only encourage those who are current on their loans to stop paying. While it can certainly lead to that, it wouldn’t be wise for a borrower to do so as there may be consequences to this.

One of which is that they could still end up paying, especially if the entire debt isn’t cancelled. There may be other factors that will influence someone’s decision to go this route, so before you stop paying, speak with a bankruptcy attorney in Miami.

Overview of the Mortgage Forgiveness Debt Relief Act

Under this act, a homeowner’s mortgage debt may be reduced. In most cases it also allows for income from the debt that is discharged on their principal residence to be excluded.

However, this act doesn’t always mean wiping out the mortgage. It could also mean forgiving in the way of foreclosure. Therefore, an owner could end up losing their home. It’s important to realize that debt which is forgiven isn’t always taxable. There are some situations where it may not be and will impact the homeowner.

Some examples of non-taxable “cancellation of debt income”:

• non-recourse loans (where the only way to deal with the default is using the property as collateral or repossessing it);
• qualified principal residence indebtedness (which applies to most homeowners), with some exceptions and limitations;
• certain types of farm debt;
• bankruptcy; and
• insolvency.

Not everyone qualifies for the Mortgage Forgiveness Debt Relief Act, so the idea of stopping payments on a current loan in hopes of using this as a way out is a risky decision. In addition, it may come with a whole new set of problems.

Other Types of Debt Forgiveness

There are other types of loan forgiveness that may be available. Student loan debt can sometimes be forgiven. Again, there may be certain qualifications that must be met. So to just stop making payments isn’t a good idea.

One of the things that many individuals don’t realize is that debt forgiveness doesn’t always mean the entire loan is cancelled. There are different amounts forgiven depending on the particulars of your case.

In addition, those who stop making payments on their loan are at risk of being in default, therefore, they may not qualify for debt forgiveness. Even the recent introduction of the Student Loan Forgiveness Act of 2012, isn’t designed to completely erase all debt. It doesn’t mean that students can stop making payments.

The idea behind this act is to allow for a point in time in which eventually payments on a loan stop. It will still require that payments equal to 10% of the borrower’s discretionary income be made for 10 years. It is the remaining debt that will be forgiven.

Unfortunately, too many individuals look at debt forgiveness as a way out, so they stop paying their loans. But this can actually prevent your debt from being cancelled. Then you are in a deeper financial hole than you began with.

Bankruptcy is a serious decision to make. But it may be your only way out if you are buried in debt. Stopping payments on loans is never a good idea. However, there may be other options available.