Today,
many people find themselves "upside down" in
one or more homes they live in, rent out, or have under
purchase contract. Perhaps the mortgage they qualified
under is an ARM and is set to adjust to a rate that
just does not make sense to them. As the real estate
market continues to deteriorate, many people find they
either cannot afford their new, higher rates, or it
simply does not make sense to continue to own a home
that has dropped tens or hundreds of thousands of dollars
in value.
A short sale (whereby the owner finds a buyer but
at a price substantially less than the balance owed
to the bank) is often preferable to a foreclosure from
the standpoint of future credit. In a short sale, the
lender authorizes the sale despite the fact the lender
will not be paid in full. The difference between the
balance owed and the amount paid on the balance through
the short sale (the amount of the loan not paid off)
is referred to as the "deficiency" and the
seller (you!) remain liable to the lender for this
deficiency. If possible during the short sale negotiations
with the lender, request that the lender NOT hold you
responsible for the deficiency. You want the release
in writing. If the lender will not release you of liability
for the deficiency, then frankly why would you bother
to keep the house and yard in good, showing condition;
assist in finding a qualified buyer; and attending
to the details that any closing requires of a seller?
In return for that, I feel the lender should release
you, especially if your alternative is to simply walk
away and discharge the deficiency in a bankruptcy.
Either way, the lender won't recover the deficiency
so why wouldn't it prefer to have your cooperation?
Unfortunately, lenders are required to issue a form
1099-C to both you and the IRS for any deficiency that
is written off and generally, forgiven debt constitutes
taxable income to the relieved debtor. However, fear
not, as long as you are insolvent before and after
the write off, or the write off is a result of having
filed for protection under the bankruptcy laws, the
income is excluded from income under section 108 of
the Internal Revenue Code. Even if you are not insolvent,
if the property was your principal residence and certain
tests apply, you can still exclude the debt that was
written off from your income. Of course,
there are some forms to fill out and file with your
tax return, but we know how to do that to make this
a much less stressful experience for you. Can other
bankruptcy attorneys help you with this type of tax
issue?
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