WASHINGTON – Congress passed legislation Tuesday to protect mortgage borrowers from having to pay taxes on debt forgiven in a bankruptcy or restructuring, which is expected to prompt an increase in bankruptcy filings among troubled homeowners.
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The bill will spare homeowners for three years from taxes as high as 35% on canceled mortgage debt. Under current law, any forgiven mortgage debt is taxable as income.
"Homeowners who restructure their mortgages to avoid foreclosure should not be hit with a tax bill as a result," Treasury Secretary Henry Paulson said. "This legislation will temporarily exclude homeowners who have restructured their mortgage loans from having to pay taxes on the mortgage debt forgiven."
