BK before or after Foreclosure, anything wrong with waiting?

[speculate]

I'm facing foreclosure and the main thing I'm worried about is getting sued for a deficiency. However, from what I read it seems many banks are not pursuing the deficiency but rather issuing 1099s instead for the forgiven debt. If that's what happens with me and because of the mortgage debt relief act, I wouldn't be responsible for taxes on the debt forgiven and my deficiency worries are over.

However, if the bank doesn't forgive the debt and instead pursues the deficiency, then I would have no choice but to file BK.

Is there anything wrong with waiting to see if there is even a deficiency being pursued before filing for BK? I know it would be 2 hits instead of 1 on my credit but any other reason not to wait to see if it happens first?

[BCA2009]

If you are in a recourse state, I wouldn't hold my breathe on them forgiving the debt. They might not pursue a judgment against you. But they have no real incentive to just forgive the debt. I'm not saying it can't happen, but all of the ones I have read about were in non-recourse states.

I, personally, wouldn't care about the "two hits". You will have a bk and a foreclosure either way. The foreclosure may not show up on your credit report, but the foreclosue will be in your county records.

[MrBankruptcy]

If they come after you for deficiency after the foreclosure and you file bankruptcy that would be wiped out. If they file a 1099 on you for the deficiency you will owe the taxes on that amount and won't be able to include that in any bankruptcy not at least in the near future. That's why if you're going to file bankruptcy, include the house in the Chapter 7 bankruptcy and it eliminates any future liability from that piece of property. It's probably not smart to wait and see what they do. If you do that it might be too late for action.

[speculate]

MrB, thank you.

Correct me if I'm wrong but if I get a 1099 and the forgiven debt is treated as phantom income, wouldn't the mortgage debt relief act passed by congress in 07 and extend through 12 relieve me from any tax consequences from that?

[Mensa1]

MrB, thank you.

Correct me if I'm wrong but if I get a 1099 and the forgiven debt is treated as phantom income, wouldn't the mortgage debt relief act passed by congress in 07 and extend through 12 relieve me from any tax consequences from that?

Yes, and if the debt didn't qualify under the mtg debt relief act if would still not be taxable income to you since you are insolvent. The way the means test works for forgiven debt taxation is, if you were insolvent prior to the debt being foregiven, or you filed Ch 7 (which of course proves you were insolvent), then the debt is non-taxable. Doesn't matter what kind of debt it is.

The is covered on IRS Form 982, filed in the tax year you have debt forgiven. Easy to read instructions.

[BCA2009]

Mensa is correct, if the property you are being foreclosed on is your primary residence, there is about 5 different ways you can avoid the income. Paying taxes on forgiven debt would not even come into play if I was trying to decide whether to file or wait. I also would care whether I had a foreclosure and then a BK or a BK then a foreclosure. They would both be the public records and future lenders would see both of them either way.

The things I would consider when deciding when to file would be: Stress level while waiting to file. Dealing with collection calls and lawsuits.

Do I need the mortgage expense to help pass the means test? Could my income go up and prevent me from qualifying for Chap 7? Do I have any potential future debts that I would want to include in BK (medical bills or other types of lawsuits)?

These are the things I would consider.