Debt Forgiveness in Challenging Times

As an attorney in a troubled economy, clients have begun to ask me about the tax aspects of debt that has been forgiven as the result of foreclosure.Basically, debt forgiven as the result of foreclosure had been subject to tax until the passage of the Mortgage Forgiveness Debt Relief Act of 2007.

This Act excludes from gross income up to $2million of cancellation of debt income (debt on foreclosed properties) if the debt reduction is for qualified principal residence indebtedness between January 1, 2007 and December 31, 2009.

Some people think this Act is a blessing but others say that those having debt forgiven should have handled their finances better.

What do you think?