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Bankruptcy Attorneys are Debit Relief Agencies Helping People File For Relief Under The Bankruptcy Code

Short Sale and Foreclosure Questions and Answers

Q. SHOULD I WORK OUT A SETTLEMENT WITH MY CREDIT CARD COMPANIES INSTEAD OF FILING BANKRUPTCY?
 
A. Here is how it works. The forgiveness of debt is considered to be income by the
Internal Revenue Service. For example, if you have a credit card to which you owe
$10,000.00. That credit card company approaches you and is willing to accept
$3,000.00 and write off the rest if you can pay them. You in turn consider this to be a great deal and you find $3,000.00 dollars to pay off this $10,000.00 credit card. At the end of the year you will get a 1099 from that credit card company for that $7,000.00. That is the amount of forgiven debt. Unfortunately the credit card company has no choice and must issue a form 1099 to you. You will owe tax to the IRS at whatever your normal tax rate is on that $7,000.00 just as if it were cash income that you received.  An exception to this rule exists if you are able to demonstrate insolvency to the IRS under its own procedures.
 
Assuming that you can not demonstrate insolvency to the IRS, this actually puts you in a worse position than you were in before you settled the debt with the credit card company. Because the tax owed is now so recent from the transaction you will not be able to immediately file a bankruptcy to discharge your obligation to the federal government. Should you have chosen to file bankruptcy on the credit card debt instead of settling it you could ordinarily have discharged the entire amount with no tax to you. This is because a discharge in bankruptcy is not a taxable event. The law does not require the creditor to issue a form 1099 to you for the discharge of that $10,000.00 credit card debt in bankruptcy. You will owe no tax on the transaction.
 
Q. SHOULD I SHORT SELL MY HOME?

A. The same general rule as to the taxability of forgiveness of a credit card debt
applies also to mortgages that are forgiven.

When you short sell your home or the bank forecloses, a "deficiency balance" is
usually created. The "deficiency balance" is that amount of the unpaid loan remaining once the short sale proceeds, or the foreclosure sale proceeds have been applied to your loan balance. This is the amount of the sales proceeds after the bank has already deducted the costs of sale. This deficiency balance can be substantial in today's real estate market. Deficiency balances of $100,000.00 - $150,000.00 are common. Except under limited exceptions in California the bank may sue you for this deficiency, then attach your wages or levy bank accounts.
 
There are two types of short sales. In the first type of short sale the bank simply
states that it will release its interest in the property to the buyer of the property.
However, they retain their rights to pursue you for any deficiency balance. Until recently those were the types of short sales that were generally accomplished. The second type of short sale is one where they will agree to release you of any deficiency balance after the short sale. Many people, and even their real-estate agents believe that they are doing a good thing if they can secure a forgiveness of the deficiency on a mortgage by participating in a short sale transaction with the bank.
 
In reality, the forgiveness of a deficiency balance can create a worse problem
for you than what you would have had if you would have simply let the bank foreclose on your home. Just like the credit card company, the deficiency balance owed would
ordinarily be discharged in the bankruptcy. However, the tax obligation that is created by the forgiveness of debt will not be discharged in a chapter 7 bankruptcy filed any time in the following 3-4 years. Even the tax on a forgiven deficiency balance from a mortgage can be disabling.

Q. DIDN'T THE MORTGAGE DEBT RELIEF ACT OF 2007 MAKE IT SO THAT I
DON'T OWE TAX ON ANY FORGIVENESS OF MY MORTGAGE DEBT?
 
A. Sometime in December of 2007 the President signed the Mortgage Debt Relief
Act in an attempt to address this concern. Generally, the Act states that if a bank does choose to forgive you of a deficiency balance on your home, then the forgiveness of that deficiency will not be considered income to you.
 
Unfortunately, this general rule is filled with many exceptions and exclusions.
Among those exclusions are:
 
1. The home involved has to be your principal residence. If it is a rental property the
    Mortgage Debt Relief Act gives you no relief.
 
2. You must have lived in the house for at least two years.
 
3. The debt involved cannot exceed your basis in the home.
    For example, you paid $250.000.00 for a home in 2001. In 2005 when the market
    was strong you refinanced you home and pulled out $100,000.00 of equity and
    put it into another house, investment or spent it. Now you owe $350,000 on a
    home that you only paid $250,000 for.  Even if the bank choose to forgive your
    debt and you lived in the home for two years you may still be subject to taxation
    on that other $100.000.00 of forgiven debt that represented the money you took
    out of the home.

Q. DID THE $700,000,000,000 BAIL OUT FOR THE FINANCIAL INDUSTRY AFFORD SPECIAL POWERS TO THE BANKRUPTCY COURT TO REDUCE OR “CRAM DOWN" MY HOME LOAN TO AN AMOUNT EQUAL TO THE CURRENT VALUE OF MY HOME?

A. No. The "Cram down" provisions of the bankruptcy law do not apply to your
home mortgage. It has been this way since 1978. Nothing was in the final version of the September 2008 legislation to change that.
 
The above analysis is not intended to be an extensive analysis reciting all of  the exceptions to the Mortgage Relief Act. There is not enough room to provide an
extensive legal analysis of the areas of law touched on herein. Your situation may differ drastically from the examples that we have provided. This has been provided for informational purposes only, and is not intended to be relied upon without a consultation with a qualified attorney regarding you specific situation. However, whether you should do a short sale or proceed in some other fashion is a very complicated question that you must look into thoroughly before you make the decision. If you make the wrong decision you could be saddled with a very difficult situation that will follow you for a number of years.
 
 
 
Lien Stripping

Q.  CAN I GET RID OF THE SECOND OR THIRD MORTGAGE ON MY PERSONAL RESIDENCE THROUGH BANKRUPTCY?
 
A.  The answer to this question in the 9th District Court of Appeals (Which includes California) is, Yes, under the right circumstances. Case law has come down over the last couple of years in this district that allows for this. 

Q.  HOW DOES IT WORK?

A.   On personal bankruptcy this process may not be done through a Chapter 7 fresh start bankruptcy. Rather it is limited to the reorganization types of Bankruptcy such as a Chapter 13 or Chapter 11 where some effort is being made to pay a portion of your unsecured debt back over the term of a plan where payments are being made through the Court. (For example payments over 36-60 months). Normally, upon successful completion of the plan then receive your discharge of the remaining balances.

During the bankruptcy you must file a lawsuit within the bankruptcy (Adversary
Proceeding) against the mortgages that you would like to strip off of your home.
In order to win that lawsuit against the mortgage holder, among other things, you
need to prove that the current market value of the home is less than or equal to
the amount that is owed against the first trust deed (or first mortgage). If you are
able to prove your case then the second and/or third trust deeds/mortgage will
be stripped off of your home and treated like a credit card. They end up receiving
a percentage of their loan with the credit cards from the payments that you are
making into the plan. The amount of those payments have no relation to the
amount that your original payments were to them under the loan agreement. At
the successful completion of the plan they are discharged with the remaining
credit card balances and you keep your home free and clear of the second
and/or third.

Q.  IS THIS AS GOOD AS IT SOUNDS ?
 
A. It can be. However, it involves a commitment. First, it involves a reorganization type of bankruptcy which is generally more expensive than a fresh start. Secondly, it involves a lawsuit. This also adds more expense. As part of that reorganization you are agreeing with the Court to make
monthly payments to the Court as part of the plan. That is something else that
you do not do in an fresh start Chapter 7 bankruptcy. Finally, you also agree that
you are going to keep the payment on your first mortgage/trust deed current during the term of the plan.
 
These two requirements prove to be the most daunting for most individuals.
Failure to do these things can and usually will mean dismissal of your plan. So,
even if you have successfully sued and completed your lawsuit against the
second and/or third trust deed/mortgage holders and you are well into your plan,
you can still loose all of that effort and investment by dismissal of the case if you
fail to continue to meet the obligations of the plan at any time during that 3-5
year period. When that happens the second and/or third trust deeds/mortgages
stay attached to your home and survive the bankruptcy that was dismissed.
 
It is very important that you carefully consider the cost and commitment of
attempting to strip the second and/or third from your home before you attempt it.
However, if it is something that you can complete, in most cases you can save a
lot of money.