The Mortgage Debt Relief Act was passed in 2007 as a response to the Mortgage Debt crisis due to sub-prime lending. Congress felt it was necessary to provide relief from taxation of Cancellation of Debt (COD) income to help solve the Mortgage Debt crisis. The act is set to expire on December 31, 2012.
The Act specifically provides relief to homeowners that have COD income on their primary residence. The loan funds must have been use to acquire, construct , or substantially improve your principal residence. If this test is met the homeowner can exclude up to $2 million of debt from COD income. The relief is cliamed on Form 982. If the debt is not completely releaved by the Act the homeowner can still use the traditional methods available which includes Insolvency, or bankruptcy exclusions.