Four attorneys general are leading the fight to extend tax relief to homeowners who faced financial hardship such as a foreclosure and were granted mortgage debt forgiveness.Attorneys General Lisa Madigan of Illinois, Pam Bondi of Florida, George Jepsen of Connecticut and Martha Coakley of Massachusetts lead the national effort of state attorneys general calling on Congress to extend the exclusion, in place since 2007. Various government agencies and industry trade groups began fighting for an extension as early as April.If Congress does not answer, the tax relief efforts put in place by the Mortgage Debt Relief Act will expire on Dec. 31. This federal act essentially dismisses a distressed homeowner’s mortgage debt in the case of a foreclosure, short sale or loan modification.With the recent push toward more principal reductions via the national settlement between state AGs and the nation's biggest mortgage servicers, hundreds of thousands could be impacted. The $20 bilion-plus settlement outlines consumer-relief mandates and servicing requirements for the nation's largest mortgage servicers.Earlier this month, Bank of America mortgage borrowers principal reductions, and said it had offered mortgage debt relief for 164,000 homeowners through September.“Failure to extend this tax relief would hurt the very families we set out to help in the national foreclosure settlement,” Illinois' Madigan said. “We need to do everything we can to encourage — not deter — struggling homeowners to seek help to stay in their homes.”The attorneys general wrote a letter to the leaders of the U.S. House and Senate requesting an extension. The letter noted that if the $25 billion national settlement does expire, principal reductions and loan modifications would become taxable income and homeowners would face up to $1.3 billion in tax increases over two years, according to the Congressional Budget Office. “This tax relief is critical for helping struggling homeowners stay in their homes as we work to repair the damage from the foreclosure crisis,” Coakley said. “We urge Congress to ensure families are not hit with an unexpected tax bill when seeking a loan modification.”More than 4,000 homeowners had received mortgage debt relief for an average savings of $67,457 per homeowner in Coakley's state of Massachusetts since the settlement was signed earlier this year.An extension is included in the Family and Business Tax Cut Certainty Act of 2012 (S. 3521), which recently passed out of the Senate Finance Committee with bipartisan support.