The exclusion for up to $2 million of cancellation of qualified debt secured by a principal residence was originally enacted in the “Mortgage Forgiveness Debt Relief Actof 2007 and extended by the Federal Bailout Legislation passed on October 3,2008. Unless Congress takes action, the exclusion is scheduled to expire after 2012.

Homeowners who have been waiting for their mortgage holders to start the foreclosure process for their delinquent mortgages might want to seek a short sale of their residence soon. Given how members of Congress cooperate, don’t count on them extending the Mortgage Forgiveness Act.

It is important not to wait too long. At the end of the year there will be many homeowners with Short Sales in play, all trying to meet the deadline. Most lenders are understaffed for current volumes, so imagine what year end will be like.

The consequences of not making the deadline could be catastrophic, so don’t delay the process if you can’t see any other way to avoid the foreclosure proceeding. Remember, most short sales take 4-6 months, with some taking much longer.

You should contact your accountant to determine what the downside is to not acting and losing control of the process. Remember to find out what happens if you do a deed-in-lieu, or allow the foreclosure to proceed. You must understand the tax implications of each action or inaction.

I would also find out what happens if you do get a large 1099 for mortgage forgiveness debt. Can you discharge it with a bankruptcy?

Remember any plan is better than no plan at all.