Deficiency on foreclosed home

[gosolar]

Just received notice that the bank got their summary judgment, on a NY rental property which is 200K underwater.

We live in Fl now for 2 years

Spoke to attorney in Fl says that we must file before the sale occurs or will get a deficiency judgment,
I thought it doesn't matter in a 7, if it is filed before or after the hammer falls.

He says we will be liable for forgiveness of debt on our fed returns that can cost big bucks.

I want to wait till last minute and keep collecting rent until the tenants find out.

What the real scope on this IRS tax and deficiency judgment.

I thought a discharge wipes it all out.

[bcohen]

You seriously think it is ok to "keep collecting rent until the tenants find out" even though the foreclosure sale has apparently already happened?! If you were a decent human being, you would have kept the tenants informed of the situation, and stopped collecting rent once the foreclosure sale was imminent. If the house has, in fact been sold, you may have to worry about a possible lawsuit from your tenants and/or from the new owner, for breach of contract and collecting rent on a property which you no longer own, and bankruptcy will not discharge this liability.

[justbroke]

Please be very careful if you are collecting rents. Your rider or your Deed of Trust (or Mortgage instrument) may have an assignment of rents clause. This may not be your money to keep.

I hope that you still qualify for a Chapter 7 because if you get into a Chapter 13 situation, having $200K+ pushing up over $300K in unsecured debt could push you into a Chapter 11! True story. The reason to file now would be that this is still secured debt and not unsecured debt.

I would consult with several more attorneys in Florida and be open with them. I don't even know if you qualify for a Chapter 7 especially with the foreclosure of the home in NY.

The IRS Form 982 clearly reads that if the amount was "discharged" in a Title 11 (Bankruptcy) proceeding, then it loses its tax attributes. So if the amount was IIB (included in bankruptcy), then it is not taxable. The problem your attorney may be thinking is if you are assessed the tax before you file. Then it's problematic. This is why you need a solid attorney that understands the tax impact. The question about when the tax is "assessed" is the question of the day. Is it when you file your taxes, or when the 1099-C is issued? Those are the deep questions for the tax specialist/attorney.

[gosolar]

You seriously think it is ok to "keep collecting rent until the tenants find out" even though the foreclosure sale has apparently already happened?! If you were a decent human being, you would have kept the tenants informed of the situation, and stopped collecting rent once the foreclosure sale was imminent. If the house has, in fact been sold, you may have to worry about a possible lawsuit from your tenants and/or from the new owner, for breach of contract and collecting rent on a property which you no longer own, and bankruptcy will not discharge this liability.

Get off your moral high ground, It is perfectly legal to collect rent, there is no provision in the mortgage not to.

Moreover there is no requirement to notify the tenants

[gosolar]

Please be very careful if you are collecting rents. Your rider or your Deed of Trust (or Mortgage instrument) may have an assignment of rents clause. This may not be your money to keep.

I hope that you still qualify for a Chapter 7 because if you get into a Chapter 13 situation, having $200K+ pushing up over $300K in unsecured debt could push you into a Chapter 11! True story. The reason to file now would be that this is still secured debt and not unsecured debt.

I would consult with several more attorneys in Florida and be open with them. I don't even know if you qualify for a Chapter 7 especially with the foreclosure of the home in NY.

The IRS Form 982 clearly reads that if the amount was "discharged" in a Title 11 (Bankruptcy) proceeding, then it loses its tax attributes. So if the amount was IIB (included in bankruptcy), then it is not taxable. The problem your attorney may be thinking is if you are assessed the tax before you file. Then it's problematic. This is why you need a solid attorney that understands the tax impact. The question about when the tax is "assessed" is the question of the day. Is it when you file your taxes, or when the 1099-C is issued? Those are the deep questions for the tax specialist/attorney.

tks

[bcohen]

[text removed by moderator], It is perfectly legal to collect rent, there is no provision in the mortgage not to.

Moreover there is no requirement to notify the tenants

[text removed by moderator]. You seriously think it's ok for a tenant to be paying rent in good faith only to be forced to move on a moment's notice once the house is sold at foreclosure which they have no advance warning of? Thank God I don't rent from private owners like you, and only do business with large corporate-owned apartment complexes.

Also, unless the tenants are in a month-to-month arrangement, I wouldn't be so sure that you have no legal requirement to notify them of the pending (or possibly completed) foreclosure.

[justbroke]

Please keep the discussion reasonable. Posters may not like the answer that they receive, but we must maintain some decorum in the Forum. (Hey, that rhymed.)

Keeping proceeds of collected rents in contradiction to the Deed of Trust, Mortgage or other instrument pledging the property as collateral, is a contract issue. Not informing your tenants that there was a foreclosure and that you are no longer the owner, is an ethics issue.

I asked that you review (read) your mortgage or other instrument to see if there's an "Assignment of Rents" clause or it's on a rider. If you purchased this home as a rental home (investment), it is very likely such a clause is contained in the closing package. Even if it were on the mortgage, it's a contract issue between you and the bank.

Personally, I do not know the foreclosure process in New York. I do not know if you have a "redemption" period or some other grace period before the ownership of the home changes. Once the ownership has changed and the new deed is recorded in the official records, you *may* then have "other" issues if you continue to collect rents for a property that you do not own (fraud). Every foreclosing bank will send a Property Preservation team (or person) to the property almost immediately after the sale is recorded. The preservation team will typically reach out to any current tenant and find out if they hold a lease or they are the "former" owner. The bank should take steps to recover any rents from the existing tenants. If the property is unoccupied, the property will be "secured" and possibly "cleaned" at that time.

Moreover there is no requirement to notify the tenants

For the State of New York, there absolutely is a requirement to notify tenants albeit that the foreclosing entity must do so. Just as in Florida, the tenants should have been listed as defendants to the lawsuit (and had that suit served upon them). If the tenants never had notice of the foreclosure, I feel sorry for them. See the State of New York Office of Financial Affairs web page under the heading AFTER A SUCCESSFUL FORECLOSURE ACTION;

The foreclosing party must notify all affected tenants of the outcome of the foreclosure judgment. There is typically a lapse between the final foreclosure judgment – which revokes ownership from the landlord – and the foreclosure sale, which completes the sale and transfer of title to a new owner. During this time, the bank has a duty to maintain the property.

If this is the case, you are past "Final Foreclosure Judgment", then your ownership has already been revoked. You may want to contact a New York attorney to help you with the New York landlord issues.

[gosolar]

bcohen, I don't need any further input from you.

I am the owner until the actual sale happens and entitled to the rents upto that date.

Two attorney's agreed with that. there is no Assignment of Rents clause.

The tenants are not named, therefor their lease survives the FC they may even stay till the lease ends for free.

I am not past final foreclosure

[flaguy]

bcohen, I don't need any further input from you.

I am the owner until the actual sale happens and entitled to the rents upto that date.

Two attorney's agreed with that. there is no Assignment of Rents clause.

The tenants are not named, therefor their lease survives the FC they may even stay till the lease ends for free.

I am not past final foreclosure

I feel no guilt keeping the rents without paying the bank..........I would talk to your CPA about this because you are not going to like what happens when you have to recapture the deprecation that you have been taking for how ever many years