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Mortgage Debt Relief Act - Is it applicable in California?

Has this Act taken affect in California yet?

Thanks

blake2's picture
blake2 | Joined: May 7, 2008 03:33 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

It is Federal Legislation so I assume it has taken affect. It was passed in August. It just protects against the forgiven debt from being taxed as income. "FHA Secure" may also be what you are looking for?

"FHASecure expands the FHA's ability to offer refinancing by giving it the flexibility to work with homeowners who have good credit histories but cannot afford their current payments. By the end of 2008, the FHA expects this program to help more than 300,000 families [url=http://www.mortgagefit.com/refinance.html]refinance[/url] their homes."

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suen64's picture
suen64 | Joined: May 21, 2008 11:11 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

thanks. On another note...I have a first and 2nd on my home (primary res. no other property owned) and both mortgages we used to purchase my home, they have never been refi'd, they are both with the same lender. I bought the home in 6/2006. Are both of my loans non-recourse loans or could the 2nd mortage get a DJ against me for the loan amount on the 2nd?

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blake2's picture
blake2 | Joined: May 7, 2008 03:33 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

My education tells me they would both only be secured by your home but that is a really good question. I am nearly sure they are both non-recourse loans but could it be governed differently in California?

I don;t think so but I asked Cliff...

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suen64's picture
suen64 | Joined: May 21, 2008 11:11 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Thanks! I look forward to Cliff's answer.

Best,
*sue

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blake2's picture
blake2 | Joined: May 7, 2008 03:33 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

What are you trying to accomplish?

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suen64's picture
suen64 | Joined: May 21, 2008 11:11 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I"m trying to find out what recourse the lender has against me if I try to work out DIL or short sale and [url=http://www.mortgagefit.com/foreclosure/17ways-avoid.html]avoid foreclosure[/url]. I know that with foreclosure they can't come back on me for more. But with the DIL or SS I want to know what they have legal right to do. If both loans are non-recourse I have a bargaining chip to avoid the foreclosure process since the outcome will be the same. In that case, either they agree to a DIL and forgive the debt and call it good, or they foreclose and add their foreclosure costs on top of the debt the they have to forgive.

However, if my 2nd is a recourse loan, then I don't have that bargaining chip and if they can come after me for the loan balance on the 2nd, then BK gets put on the table. Of course I'd like to avoid that...

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blake2's picture
blake2 | Joined: May 7, 2008 03:33 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

With the DIL the second mortgage could possibly still be attached. So I would say the Short Sale will be a much better option for you. When you work with someone who really knows how to do a short sale they will take care of the second. For many reasons, it is extremely important that you work with someone that really knows the short sale process well.

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suen64's picture
suen64 | Joined: May 21, 2008 11:11 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Thanks!

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larry2's picture
larry2 | Joined: June 27, 2007 02:50 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi suen.

The Mortgage Debt Relief Act 2007 or Mortgage forgiveness Act does not apply in California. So if your debt is forgiven then you will have to pay tax on it as it will be considered as your income.

BTW know more about Tax Break for Mortgage Debt Forgiveness at http://www.mortgagefit.com/tax/debtforgiveness-reliefact.html

Best of luck,
Larry

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Thanks Larry. I spoke to FTB the day after I asked this question. So the Mortgage Debt Relief Act 2007 only applies to Federal Taxes but not State, as you say. So, there would be no Fed taxes but there would be State. That said, I spoke to a BK Atty who told me that since both of my loans are purchase money loans, which makes them non-recourse loans, I wouldn't be liable for the taxes either. Is that your understanding as well?

Thanks,
*sue

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Jessica's picture
Jessica | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Suen,

Nice to have you back here. But did you get logged out while posting?

I think there's a slight confusion here. It is true that the tax on unpaid debt is a kind of federal tax and not state tax. And in case of a purchase loan, one doesn't need to pay the deficiency if he's in California (anti-deficiency law). But just because the Mortgage Debt Relief doesn't apply here, one has to pay tax on any unpaid deficiency amount.

I hope I could clarify it. If you have further doubts, please don't hesitate to discuss with us here.

Regards,

Jessica

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I am thinking of walking away from my home. I have a first and second. I intend on paying the second. I have another home that is co tenants, that I will moving back too. Can they come after me for that home?

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Niicss's picture
Niicss | Joined: October 3, 2005 11:54 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Azngirly!

It is good that you will be paying off the [url=http://www.mortgagefit.com/second-mortgage.html]second mortgage[/url]. But if you do not pay the first mortgage, the first lender will foreclose the property. The first lender may also place liens on your other properties if his debts are not recovered. There are chances that the lender may garnish your wages as well.

Thanks.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Will a short sale cover both first and second mortgage?

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Niicss's picture
Niicss | Joined: October 3, 2005 11:54 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Washington state

As far as I know, a short sale will not cover both the first and the second mortgage. The first will try to satisfy his dues first. If there is a deficient amount from the sale, then you need to pay it to the first lender.

Then comes the second lender. He will then try to recover his dues. If you cannot pay him the dues, he will then charge off the loan to a collection agency who will in turn collect the dues from you.

Thanks.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

My husband's employer is requiring him to relocate too far to commute. We are upside down on our house about 175,000. If we can't do a short sale, and we have to foreclose, do we have to pay the difference of our 376,000 loan to the value of our home now? What about a bankruptcy, will that eliminate that issue? We live in California. It is looking like we might have to go the foreclosure route at this point in time. What happens? The bank isn't really willing to work with us. Thanks for any info that you can provide. This is so stressful, we didn't get in over our heads when we bought, but now that we have to relocate, we find ourselves in a real big mess.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

It is my understanding that if the 2nd loan is also a purchase money - nonrecourse (in california), then the 2nd lender cannot come after you for the deficiency.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Can you be forgiven on a heloc as a second loan against your property if you can not afford it. What happens if you pay the first loan and not the second against the property? If the 2nd lender can not come after me for the deficency, what happens to the 2nd?

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi helpmeplze,

The second lender can come after you for the deficiency. It is completely up to them if they will forgive the deficiency or will come after you for it. If you pay the first loan, but default on the [url=http://www.mortgagefit.com/second-mortgage.html]second mortgage[/url], the lender can foreclose on your property because they have a junior lien on the house.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I received a 1099-C cancellation of debt income thru Loan re-structuring, I Know that as of 2009 CA don't honor the debt relief act 0f 2007. Does CA have such thing as Qualified Principal Residence Indebtedness and what form should I fill out for this?

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I am current with my 1st mortgage. I could not pay monthly payments to my 2nd loan since June 2008. In December 2008 my bank approved my loan for a charge off and sold it to a collection agency. However, collection agency sent it back the bank again after 6 months. My 2nd loan is again with the same bank. When I asked the bank what was the reason why my loan returned to your bank by the collection agency they simply said we don't know. My 2nd mortgage bank served with a foreclosure notice in July last year. I should also metion that I filed for [url=http://www.mortgagefit.com/bankruptcy/chapter7.html]Chapter 7 bankruptcy[/url] in 2007 and it was discharged in February 2008. Both the loans were included in the banruptcy and were not reaffirmed. Can you tell me what will possibly happen in my case?

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi bbar,

The income from the cancellation of debt is exempt from taxes under the Mortgage Forgiveness Debt Relief Act, which is applicable to the debts discharged in 2007 through 2012. The amount of the forgiven debts, which you can exclude on your federal income tax return, will have to be included in your income for California tax purposes. There is a California law that allows borrowers to exclude the income from discharge of indebtedness. But as far as I know, it applies only to debts discharged in the years 2007 and 2008.

Hi Hadian,

You included your first and the second mortgages in the bankruptcy and both of them were discharged, right? If they have been discharged through bankruptcy, you’re no longer responsible for the mortgage debts. But the bankruptcy does not remove the mortgage liens from your property. So, the lenders can foreclose your house, if you stop making payments. However, the foreclosure will not affect your credit as the debts have already been discharged through bankruptcy.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have a 1st and 2nd mortgage, both for a primary residence and never re-fi'd. I received a 1099c for the 2nd in Dec 2009 (stopped paying in June 2009). I got notice that the house would sell at auction Feb 2010. I have not received anything re: the auction or the 1st mortgage. It is my understanding that the forgiven debt on the 2nd will be taxable per state but not federal. Is this correct? And what about the 1st? Will I receive any paperwork or documentation? I am trying to complete my 2009 taxes and am not sure what to do since I haven't received anything about the 1st mortgage. Please help!

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savior70's picture
savior70 | Joined: March 25, 2009 05:14 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

To needhelp,

If you received a 1099C Form from your second mortgage lender, it means he has forgiven the remainder of the debt. This will be your taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, you do not have to pay any tax to the IRS for this forgiven debt amount, provided you have used the property as your primary residence.

If the first lender forecloses your property they are required to send you a Form 1099A for acquisition and abandonment of secured property. If the lender forgives the deficiency, they will also send you a Form 1099C.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I live in California. I have a residential and renting houses that were foreclosed by the banks.

Question #1. The bank for the rental home sent me the 1099C. Do I have to include this forgiven debt in my 2009 federal income tax?

Question #2. The bank for my residential house sent me only the 1099A, but not the 1099C. I called them twice and the bank said they did not have the 1099C for me. Does this means that the bank did not forgive this loan that was the reason they did not send out the 1099C?

Question #3. Do I have to pay California Tax for these two foreclosed properties?

Thanks for your help.

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jerry's picture
jerry | Joined: October 17, 2005 03:24 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Bill,

The bank sent you the 1099C Form because they have chosen to forgive the deficiency. This will be considered as your taxable income and you will have to report it on your Federal income tax return. Debts discharged on principal residence are exempt from taxes under the Mortgage Forgiveness Debt Relief Act, 2009. But since this was your rental property you will have to pay taxes on the forgiven debt amount.

If your bank for the residential house did not send you the 1099C Form, it means they have not forgiven the deficiency yet and they can come after you to collect it at any time. They may discharge this debt and sell it off to a collection agency.

The Federal Mortgage Forgiveness Debt Relief Act, 2007 does not apply in California. The state has its own debt relief act regarding taxes on the forgiven debt amount. You will have to pay taxes for the discharge of indebtedness on the foreclosed properties, unless you were bankrupt or insolvent at the time of the foreclosure.

Thanks,

Jerry

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Governor Schwarzenegger on Monday signed SB 401 (Wolk) into law providing distressed homeowners with state tax exemption on debt forgiven in a short sale, foreclosure, or loan modification. Effective immediately, this bill generally aligns California's tax treatment of mortgage debt relief income with federal law. For debt forgiven on a loan secured by a qualified principal residence, borrowers now will be exempt both from federal and state income tax consequences. The tax exemptions apply, with certain restrictions, to debts discharged from 2009 through 2012. Californians who have already filed their 2009 tax returns may claim the exemption by filing a Form 540X amendment.

Taxpayers who do not qualify for the above exemptions (e.g., second home or rental property) may nevertheless be exempt under other provisions. Most notably, taxpayers who are bankrupt are exempt from debt relief income tax. Also, taxpayers who are insolvent are exempt from debt relief income tax to the extent their current liabilities exceed current assets.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

our house was foreclosed and the 2nd mortgage was charged off, I wanted to know what I cn do to removed it other than paying it in full? thanks!

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savior70's picture
savior70 | Joined: March 25, 2009 05:14 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

To anonymous,

Talk to your second mortgage lender to find out if the debt has been sold off to a collection agency. In case it has been sent to a collection agency, you need to get in touch with them. You can then negotiate with them and try to settle the debt for an amount less than what you actually owe. The collection agency is likely to accept your settlement offer if you can negotiate properly.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

two questions. Can 2nd mortgage company foreclose on property after charging it off? If sued by CA are there limitations to what they can do? Contacted them and they wouldn't work anything out, just an our way or the highway offer was made and then started talking suit and possible wage garnishments and such. What options if any do I have now?

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Niicss's picture
Niicss | Joined: October 3, 2005 11:54 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Once the second mortgage lender has charged off the loan, he won't be able to foreclose the property. The CA will come after you in order to recover the rules. However, there actions will be guided by the FDCPA rules. In order to garnish your wages, your CA will have to file a lawsuit against you and get a judgment.

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annsmithx's picture
annsmithx | Joined: May 15, 2013 02:42 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Debt forgiveness is a fantastic thing for many people, as it means less than the whole of a debt has been compensated though the debt has been satisfied. However, it's considered taxable income and the mistake of a debt forgiveness tax break for foreclosures or short sales of homes is set to bite some taxpayers.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Our home was foreclosed four years ago. We also had a second mortgage. To this date we have never received a late notice or bill on the second mortgage and assumed it was settled in the foreclosure. Today we received a bill saying it is 46 months past due and they have sold it to a collection agency. We live in California. Do we have to pay this second mortgage now after all this time??

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi ishikawa,

If the second mortgage lender did not get back his dues after the foreclosure sale, then he can come after you to recover it. You will be liable for paying off the dues.

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