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Understanding Home Foreclosure and Debt Cancellation

By Edited Apr 1, 2014 1 2

If you are like many other home owners, your position in your home is upside down. Upside down means that you owe a significant amount more on your primary (and secondary) loan than what your house is actually worth in the current market. A simple and fast way to check what the market may view the current value of your home is to check online at such websites as Zillow, Trulia, Eppraisal, etc. While this article is no means a substitution on consulting a licensed Real Estate agent, lawyer, or attorney, I have certainly used the following ideas to help me understand how the IRS Debt Cancellation policy will affect my decision to continue to keep my home or otherwise (e.g., foreclosure or shortsale).

Can you afford your home? While spending no more than 35% of your monthly income on your residence is ideal, many families are spending much more which means that the extra amount going to your mortgage is eating into such things as your ability to pay for food and utilities, not to mention other bills such as recurring credit card payments and other loans you may have at this time. If you find that you cannot save at least 10% of your monthly income for a Rainy Day Fund, then you should seriously finding housing that will allow you to do so - this market is not getting better anytime soon.

Can you wait for the market to get better? Remember that waiting for the market to get better has a good side and a bad side. The good side is that if you wait, an increase in property values will help everyone but the bad side is that everything else usually gets more expensive. But wait; there is more, surely the market, like any other event is based, more or less, on a cyclical pattern. What needs to be understood is not if the pattern will eventually rise but, rather, how long will it take to rise? There are policies and laws that have been enacted on a Federal and State level but many losses have been realized and there will be significant amount of time that will lapse before Americans are confident at the levels seen in the past. Are you willing to wait a decade to see the value of your home finally reach the value of the principal of your home loan?

It is all about the timing. Surely, if you can: 1) afford to pay for your current mortgage, and 2) afford to wait out the current lows in our real estate market then you could be in a safe position. If you can honestly stay put then this may be best for you. If you cannot afford your current situation, I recommend reading the IRS' current position on Home foreclosure and Debt Cancellation. This position is based on the current "Mortgage Forgiveness Debt Relief Act of 2007" and will be your best initial investment of time as this debt forgiveness policy has an expiration date.

In some cases and in certain areas, the local real estate market may not be reflective of the country's average. You may even find yourself in a sustaining market such as the San Francisco Bay Area. For all of us, there is value in reassessing our living arrangements and our saving and spending habits because at the end of the day, we will be held accountable. Trust your instincts but be sure to check with a professional before making any major financial decisions. May good fortune be at your side.


Dec 29, 2010 8:14pm
This will be a helpful article for many people struggling with this problem.
Dec 30, 2010 1:27pm
Thank you.
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