Bill would ease tax debt for many in foreclosure: Senate could vote on Stabenow plan during December

This story was featured in the Lansing State Journal today. This could help a ton of people in our area. Will it pass? What do you think?

Mara Lee
State Journal correspondent

Sue McClung lost her $40,000-a-year secretarial job in May 2006. Then, as her job search dragged on for more than a year, she lost her $130,000 home in Lansing.
For seven months, she stayed current on the $1,000 monthly mortgage, thanks to unemployment benefits and a pension from a previous state job. But when benefits ran out, a $7.50-an-hour retail job wasn't enough to cover the payments and support herself and a daughter in college. "I just thought, 'I can't do this,' " she said. McClung, 54, now has a new job, and is renting a duplex in Mason.

But her nightmare isn't over.

Although her house, which is owned by the bank, now sits empty, it still could cost her.
If it sells for less than what she owed, McClung will owe taxes on the difference between her mortgage balance and the price the bank gets. Debt forgiveness is considered a loss to the bank and taxable income for the former owner.

A bill from U.S. Sen. Debbie Stabenow, D-Lansing, would change that. Under Stabenow's bill, people who lose their homes to foreclosure would be absolved from future tax liability on the sale of the home. Similar legislation passed the House last month, but it has yet to be considered in the Senate. Stabenow called this week for a vote on the bill, saying the tax change is urgently needed.

Many factors

Analysts at the Congressional Budget Office project 400,000 U.S. homeowners have been or will be in McClung's position this year and in the next two years because of a downturn in the housing market. Just this year, about 100,000 foreclosures have been initiated in Michigan, according to Realty-trac, a foreclosure research firm. Stabenow said owning a home is the American dream. "Too many people now are seeing that (dream) slip away," she said.
Around the country, sharply rising adjustable-rate mortgages among people with poor credit and small-scale real-estate investors have driven the rise in foreclosures. But in Michigan, Ohio and Indiana, subprime lending is only part of the problem - many borrowers also have trouble meeting their obligations because of unemployment and replacement jobs that pay less.
That's what happened to McClung. She found a new job as a receptionist and executive assistant in September, although it pays $10,000 less than her former job.
"I was picked out of 400 people," she said. "I'm very blessed."
But she worries about what will happen if the bill doesn't pass. How can she pay taxes on tens of thousands of dollars she never even saw?

Stabenow agrees.

"That makes absolutely no sense," she said.

Many other priorities

A vote on Stabenow's bill could come next month, but her proposal has to compete with many other must-do priorities before Christmas - including passing the budget for next year.
McClung, meanwhile, says owning a house as a single person is too hard, and she'll never do it again.
"I'm still recovering," she said.