Big lenders say they will make it easier to avoid foreclosure. But watch out for tax bite!

We’ve reported before about Project Hope, which is a non profit that was designed to help people threatened with foreclosure. It got a lot of PR when it started, but has helped relatively few people. I know at least two people who couldn’t even get a call back!

Well, now they are trying again. They are announcing a new agreement with major lenders that they say will make the whole process easier.

Here are some of the important parts of the agreement:

1. They promise answers within five days on some proposals.
2. They will no longer allow the holder of a second mortgage to sink a deal with the primary mortgage holder, something that has been a real problem.
3. If nothing can be worked out to save the home for the owners, they will allow a “short sale” instead of foreclosing. Under a short sale the owner sells the house for current market value, even though that is less than the outstanding mortgages and the lenders forgive the difference. This is much better for your credit, and your nerves, than a foreclosure.

The bad news is that, under current law, most debt forgiveness, has its own big problem: taxes. Except in certain circumstances, when your lender forgives some part of your loan — by lowering the principle, for example – you are liable for taxes on that amount! You could owe the government thousands of dollars.

Many consumer groups and major unions are lobbying heavily to fix this problem. They are pushing to get Congress to pass the Mortgage Forgiveness Debt Relief Act of 2007. Let’s hope they succeed soon!

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