mortgage

Walking away from mortgage is costly

"When you don't have to pay a debt back, you effectively have income you didn't have originally," says Eric Smith, IRS spokesman.

Thanks to recent and temporary tax law changes, homeowners with unpaid debt may get some relief from these tax obligations. Homeowners who default on their primary residences won't have to pay income taxes as long as the debt was incurred between 2007 and 2012. After that, the taxes are scheduled to kick back in.

However, homeowners still must pay taxes for debt income exceeding $1 million, or $2 million for married couples filing a joint return. Debt from a vacation or second home, rental property or other business property does not qualify for tax-relief.

Homeowners who flee their mortgage obligations will not experience more serious consequences, such as prison time, says Coscarelli.

"We don't have a debtors' type prison concept anymore," Coscarelli says. "The pure fact that you default on a mortgage won't send you to jail."

Going on offense

If you can't make your house payment -- or simply need to move far away from your present dwelling -- there are alternatives to foreclosure or short sale.

The best defense is responsible offense. Experts urge homeowners to contact lenders as soon as they start falling behind financially to negotiate lower rates or other terms that preserve your home and safeguard credit.

"If you're not making headway, contact a (Housing and Urban Development)-approved counselor to help," Bittner says.

Under the Homeowner Affordability and Stability Plan, the government has started to offer help to up to 9 million families so they can restructure or refinance their mortgages to avoid foreclosure.

HUD also has approved counselors and other resources in every state who don't charge anything to help homeowners try to stay in their homes.

The National Foundation for Credit Counseling, which recently got $16 million in federal funding to help troubled homeowners, also has counselors trained to help homeowners negotiate with lenders to try to keep their homes.

"People can come to us for free if they need help and want someone to hold their hand," says Gail Cunningham, the foundation's vice president. Some companies promise to help homeowners abandon their dwellings and wipe away financial woes instantly. However, they often charge fees for services that nonprofit organizations offer for free, Bittner says.

"We've seen companies charging $500, $1,000 (and) $1,500, for services that are bogus or for services people can get for free," Bittner says.

Short sales and reverse mortgages

As mentioned earlier, a short sale can sometimes -- though not always -- protect your credit better than a foreclosure.

In a short sale, the lender agrees to allow you to sell the house for less than the amount remaining on the mortgage. Banks agree to short sales because they don't have to take possession of a house and take on the costs of having to resell it.

A short sale lets borrowers "wipe the slate clean" with their lender, says John Mechem, spokesman for the Mortgage Bankers Association.

Ask your lender directly about the possibility of a short sale or ask a credit counselor to help you try to get one.

Before you sign the dotted line on a short sale, ask the lender if they will report the sale to credit agencies as "paid satisfactorily," a notation that will help protect your credit score.

Finally, reverse mortgages may also have less impact than a foreclosure for certain seniors who can no longer afford to keep making payments.

A reverse mortgage allows the homeowner to tap into the equity of a home while remaining in the dwelling without making additional mortgage payments. The arrangement continues until the homeowner sells the property or dies.

To qualify, homeowners must be at least 62 and have significant equity in their homes. Financial pros say reverse mortgages aren't the best choice for everyone. So it's important to seek the counsel of a trusted adviser, or groups like the AARP's reverse mortgage education program.

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