Foreclosure & the Cares Act

Foreclosure & the Cares ActPin

What You Need to Know About the CARES Act and Foreclosure

When the CARES Act was signed into law this past March, 2020, it gave homeowners who had government backed mortgages, protection from foreclosure up through August 31, 2020.  The primary purpose of the new law was to keep homeowners and renters in their homes.

The government backed loans included the FHA, VA, USDA, Ginny Mae, and Freddie Mac. It did not protect those homeowners who had direct mortgages with mortgage lenders, or private party loans. Prior to the August 31 expiration date, the government agencies mentioned above have now extended the protection through December 31, 2020.

Other problems caused by Covid-19

Other conditions of the CARES Act allowed homeowners and renters who were having a financial hardship, to request forbearance, a pause in making monthly payments, for up to 180 days. Plus, an additional 180-day period could be requested.

The effects of the coronavirus have created economic havoc with the USA economy, as well as in other countries. The forecast of any appreciable relief by the new extension to December 31, is questionable, at best.

This is going to carry-over to banks & other lending institutions too. When a bank has a large portion of its mortgages in default, with no payments being made, how long do you think they will be able to stay in business?

As late as July, a month ago, there were over 8,800 USA properties that were in foreclosure. This figure, compared to a year ago, was down about 83%, indicating that the CARES Act did its job. However, what’s going to happen on January 1, 2021?

Prospects of more extensions of the CARES Act

We read every day of more job losses as companies have made permanent cutbacks and many others have closed their doors for good. Will there be further extensions of the CARES Act? Will those extensions create severe cash flow problems for lending institutions?

According to Todd Teta, the chief product officer of ATTOM Data Solutions, “We anticipate that because of the coronavirus itself, and the impact that it has had on unemployment, our prediction is that about an additional one million properties will be in foreclosure over the next 18 months.

What happens if my total debt isn’t paid?

Even worse, what are the possible tax consequences that would come into play when your home is foreclosed upon. Normally, in a foreclosure, if the lender doesn’t get the full amount of the mortgage paid from the forced sale, they usually forgive the amount of the difference.

The IRS says that if a creditor makes a reasonable effort to collect the debt, and forgives all or some part of it, then the amount forgiven is taxable income to the debtor. A simple example works like this:

Let’s say you owe $5,000 on a VISA card to your bank. You work with the bank the best that you can, and are able to pay them $2,000 total. The bank forgives the $3,000 balance and the debt is gone. At the end of the year, you get a Form 1099-C from the bank showing the $3,000 forgiven. You must report that amount on your tax return as taxable income, and pay income taxes on it.

The rules on reporting debt forgiveness on a primary residence are different, however. Assuming the home is your main residence, you are permitted to exclude up to $2 million on a jointly filed tax return, of any debt that was forgiven.

A rosy future?

All is well and good…for now. Unfortunately, this tax break is only temporary, and is set to expire on December 31, 2020. We have a number of situations that could occur. Firstly, this is an election year, and who knows what will happen if things change.

Secondly, with the massive unemployment, and the prospects of increased foreclosures, the real estate market could tank as it has done before. With property values dropping severely, will Congress extend this temporary tax break again? Either way, I believe we’re going to be having more serious problems.

A lot of people aren’t even aware of this expiring tax break, or for that matter, probably don’t know or understand that forgiven debt is considered taxable income. There may be other ways to exclude this income that involves bankruptcy or insolvency.

If you get a Form 1099-C in the mail or have considered bankruptcy, don’t file your own return. Find an experienced, competent tax professional and lay all of your cards on the table. Tell them all of the facts and don’t let anything out.

The professional will ask you a lot of questions to determine if insolvency can be claimed in your situation. Watch out for scams that make promises that are too good to be true – there are many!

Summary & our advice to you

Of course, the best way to prevent all of this from happening is to contact your mortgage lender before things get out of hand. Explain to them why you are having problems paying the loan and try to work out a mutually agreed upon payment plan.

I can’t emphasize more strongly… keep your lender(s) in the loop. Communicate with them as often as you need to in order that they are aware of your situation. Being an ex-bank commercial lender, I can tell you first hand that a bank does not want to go through a foreclosure. They will work with you to prevent that as long as you stay in close contact.

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