Forty-one state attorneys general signed a letter Tuesday urging U.S. House and Senate leaders to extend the expiring Mortgage Debt Relief Act of 2007. The attorneys general argued failure to extend the act would take away from the national mortgage settlement.

“Requiring a homeowner to pay income tax on forgiven or canceled mortgage debt would make the National Mortgage Settlement much less effective,” the letter states.

The act, which is set to expire December 31, 2012, allows taxpayers to be excluded from paying taxes on forgiven debt from a foreclosure, short sale, or loan modification.

In a release, Nevada Attorney General Catherine Cortez Masto explained the act is expiring at a time when homeowners are benefiting from the national mortgage settlement, which obligates five of the largest mortgage services to provide $20 billion in credited consumer relief. The relief must be provided within three years as of March.

“I urge Congress to extend this critical tax exclusion so that families in need are not stuck with an unexpected tax bill or deterred from participating in this historic settlement,” Masto said.

The letter also points out that failure to extend the act could lead to $1.3 billion in tax increases, according to the Congressional Budget Office.

According to report from settlement monitor Joseph Smith, servicers have provided $13.1 billion in relief through short sales, or about or about $115,672 per borrower as of September 30, 2012. In addition, 21,833 borrowers received a first lien principal reduction modification and received $2.55 billion in relief, which averages to about $116,929 in debt forgiveness for each borrower.

In February, the federal government and 49 state attorneys general announced a mortgage settlement with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial. Oklahoma Attorney General Scott Pruitt opted out of the settlement and was also one of the attorneys general to not sign the letter.