"Short" Sale Information.

[zania22]

I am not a lawyer nor a realtor. I just went through the experience and asked a lot a questions. Please get legal advise especially for your state.

I actually did a short sale and bankruptcy. I was just discharged two weeks ago and closed on the short sale three weeks ago.

I attempted to deal with my finanical issues individually first before considering bankruptcy. I was going to short sale the home, pay of my credit cards, and more, etc. I got an offer and began working with my home loan lender (Bank of America/Countrywide in October 2009)

So when my initial attempts weren't working, I consulted a lawyer in February 2010, then filed for bankruptcy in May 2010 and had my 341 Meeting in June 2010.

In a state where I live like NJ with deficiency judgements, Short Sales and Bankruptcy can go hand in hand.

I say this because our legal document for home ownership is a "mortgage" vs "deed of trust".

My lender bank of america would've definately pursued a deficiency judgement for the 100K difference between my sale price and the home loan balance. The Mortgage Act of 2007 deals with tax consequences not deficiency judgements. In "deed of trust" states deficiency judgements for short sales, foreclosures and deed-in-lieu of foreclosures rarely happens.

But because the home loan was discharged in the bankruptcy they can't. The benefit I gained from the short sale was not credit related, it was legal. Bankruptcy took care of any financial obligation to pay anything related to the home loan, shortsale or not. However, until the title is transfered to someone else besides me via sale or foreclosure, I was legally responsible for the property and since it was vacant I lost my home insurance.

Recall that your real estate transaction had two parts: a home loan/note and contract in the form of "mortgage" or "deed of trust". Bankruptcy took care of the home loan/note part and the short sale ( in a manner faster than foreclosure) took care of the contract part.

I still don't recommend beginning a short sale after bankruptcy. It's a lot of paperwork and the lenders are slow and overwhelmed. Bank Of America really finally said yes when they saw I had filed bankruptcy and realized then accepting my short sale offer was better than foreclosure for them.

Best wishes to all who are reading this. I believe we will have a healthy relationship with money and discipline against any dishonorable forces or influences that could result in bankruptcy again.

[livingincalv]

Is it worth filing for BK post a short sale?

Hello all,

I'm new to this forum and have tried to find information about my specific inquiry. I've found posts about filing for bankruptcy BEFORE completing a shortsale. My question is the reverse: I completed a short-sale on an investment property and am wondering if I should now file for bankruptcy.

In April 2010, I completed a shortsale. Initially, the lender promised to forgive the debt if I short-saled. In the final agreement, the lender included the verbiage, "the lender or the mortgage insurance company retains rights to file a deficiency". Hence, the lender went back on its word. My real estate lawyer told me to complete the short sale regardless. Although he couldn't get the lender to change the verbiage, he assured me that I have enough documentation to later sue the lender for subterfuge.

The nature of this property was considered investment, even though I disagree. This property was initially my primary residence, but due to my hardship I moved out of it and lived with my mom. Because of this, the lender considers it investment property.

In any case, I'm feeling uncomfortable and desire to protect my and my newly wedded husband's future. The property was in LV, NV so I have 6 years statute of limitations (SOL) until April 2016, if I will be sued by either the lender or mortgage insurance company.

Here are my problems:

1) Despite all the efforts to protect my husband, my debt might fall on him(the property's title and loan was only under my name). We signed a prenup keeping everything seperate and I recorded it in the county recorder. We file taxes married but seperately.

2) If either the lender or mortgage insurance company files a deficiency judgement, I will owe $230,000. They have 6 years to do so. (By the way, I had only 1 mortgage)

3) If the lender forgives me, then the $230,000 will be viewed as a cancellation of debt, and I will have to pay taxes on it because it was considered investment property. That is about $70,000+. Obama's Debt Forgiveness Act doesn't work for me since it wasn't considered my primary residence.

4) I have a net worth of $-100,000.


Here are some marginally "good" things in my case:

1a) For 2010 taxes, I might be able to prove that I'm insolvent. However, I've heard that it is hard to prove and it may be invalid since my husband earns a high salary.

2a) I can file for Ch. 13 BK. This proves that I'm insolvent.

Here is my question:
1b) Should I file for bankruptcy even though there is no deficiency judgement and/or 1099 as of yet? I am filing BK so that I can PROVE insolvency, hence avoid being assessed for the taxes on the $230, 000 cancellation of debt.

Any other advice or similar situation, I would much appreciate it. Thank you for reading!

[jmanford]

I'm sorry, but that lawyer that told you not to worry about the defiency judgment gave you some bad advice. They can absolutely pursue you. Will they? Who knows. They do it though.

[jmanford]

If it was me I woldn't file BK til they came looking for the money.

[zania22]

Hi livingincalv,
I experienced the same temperament with my realtors. They were very persistent and aggressive. Actually I had really dropped my short sale hopes when my overall debt efforts weren't working and found comfort in bankruptcy. After all, I started in October 2009 and didn't close until August 2010. It just so happened that the realtors were persistent and my buyer was a wealthy investor that had plenty of time.

The realtors will paint an unfair picture showing only the strengths of short sales and not weaknesses. And they know which states are deficiency judgment possible states. Those states where I live like NJ who use a "mortgage" as their legal contract where the buyer holds the title will more likely do deficiency judgments. But those states who use "deed of trust" as their contract will most likely not do deficiency judgments and have non-judicial very fast foreclosures because a third party trustee holds the title.

I don't have a conclusion for you, I hope which or when ever(after/if the deficiency judgment comes I think you can use that on your means test to get the bankruptcy, not sure) you choose works out.

One thing I wanted to comment on that I you discuss is this: "If the lender forgives me....and I will have to pay..". You discuss the tax component and judgment component as if they are related. It's my understanding (and I'm not a lawyer), that they are not related. That's why the Mortgage Act of 2007 protects the tax component for primary residences but we citizens don't have anything to protect us against the deficiency judgement component, except bankruptcy. Part of my short sale closing documents was a 1099 related form which I signed that says that the difference will appear on my 2010 tax returns. So at closing we basically reported to the IRS ourselves the transaction and that it was a "gain" for us. The deficiency is a choice lawsuit by the lender. In "mortgage" contract states they have judicial procedures so they are more likely to file the judgment lawsuit.

Best wishes

[calgirl67]

zania22: Are you saying you have to pay tax on your forgiven debt even though it was discharged in BK? How can they tax you for forgiven debt when that debt no longer exists?

[zania22]

Wanted to just make a further suggestion to research your state.

It's public knowledge on the internet if your state uses mortage theory or deed of trust theory. And some states like California I think it varies in the part of California.

In mortgage theory states lenders most likely purse deficiency judgements for differences in short sales, foreclosures,sheriff sales, or deed-in-lieu of forclosures. Forclosures are judicial and a lot longer since they have to get the title away from the owners.

In deed of trust theory states lenders won't likely pursue deficiency judgements and forclosures are non-judicial and a lot faster as a third part trustee holds the title

[zania22]

zania22: Are you saying you have to pay tax on your forgiven debt even though it was discharged in BK? How can they tax you for forgiven debt when that debt no longer exists?

No, The Mortgage Act of 2007 first signed by Bush and extended by Obama stops us from paying taxes on the difference for primary homes. And a bankruptcy would prevent paying the judgement on the difference.

I am covered from paying the taxes because of the Act and from paying the judgement because of the bankruptcy.

But if the property is an investment property, the Mortgage Act doesn't apply. I don't know if investment property tax obligations are dischargable in a bankruptcy. I don't know about that.

[calgirl67]

Actually I just found some info about 1099s issued on discharged debts:

There are No Tax Consequences From Discharging Debts in Bankruptcy. When the forgiveness of debt occurs in a bankruptcy case, Internal Revenue Code section 108(a)(1)(A) specifically provides that it is not to be treated as income. Thus, discharge of a debt through a bankruptcy proceeding is excluded from gross income for tax purposes.

Creditors Sometimes Cause Problems by Issuing Form 1099-C. Even though the law is clear that discharged debts are not to be treated as taxable income, some creditors erroneously believe that they are required to send a bankruptcy debtor a form 1099-C when a debt is discharged in bankruptcy. Obviously this causes confusion to tax preparers who are often accustomed to including all income reflected in 1099 forms as income to the taxpayer.

What Should a Debtor do If Creditor Issues a 1099-C after Bankruptcy? If a credit card company issues a debtor an IRS form 1099-C after a debtor has received a bankruptcy discharge, the debtor has two options. The first would be to contact the creditor to advise them that the 1099-C was issued in error. However, since such creditors have no incentive to actively resolve this, the better option would be for the debtor to directly advise the IRS about the filing of the bankruptcy. The debtor can do this by writing a simple letter to the IRS supported by a photocopy of the bankruptcy discharge order and the schedule containing the specific debt. Alternatively, the debtor or his accountant can file an IRS form 982, which enables the debtor to point out to the IRS that the debt forgiveness (by virtue of the bankruptcy discharge) occurred in a bankruptcy proceeding and has no tax consequences. It is very easy now to go on line and obtain a PDF copy of IRS form 982 (or any other tax form).

[zania22]

calgirl67,
this is good news for our fellow bankruptcy forum friend who has an investment property. But I'm not sure about the timing. As I understand it, the short sale difference will be known to the IRS for our 2010 tax return filings as the 1099 related document was part of the short sale closing documents we signed. If and when a deficiency judgment comes it could be part of a list of obligations to be discharged. But when will that come? The home loan will not be on that list to be discharged since the short sale has already passed? A bankruptcy lawyer in their state needs to address these questions.

All the best

[lorrieduke]

Hi everyone,

My forclosure is done. Our house went for auction on the court house steps July 13th. I was curious and was there. The lender wanted the opening bid to start at $413,000 which was crazy since in May the property appraised for $186,000. As expected no one bid and it went back to the lender.

A few days later a gentlemen from Prudential came knocking on the door. He said he was representing the bank and wanted to know our intent. He suggested a few options.
1. We could buy back the house
2. We could stay and risk eviction or
3. If we promised to be out in 3 weeks, leaving the place broom clean they would give us cash for keys in the amount of $2000.

He handed us a paper which listed items not to be removed from the home upon leaving such as the air conditioner/furnace, hot water heater, cabinets, carpet, landscaping, etc. He said we could not leave things we didn't want and destruction of the property would invalidate the agreement. He also said we could take the ceiling fans as long as we did it neatly and if we didn't want to take our frig we could leave it as long as we left it plugged in but everything else, including trash had to be gone. He said we could think about it but if we chose cash for keys the 21 days begins on the day he first visited us. We choose option #3, cash for keys.

We met with the guy at the Prudential office building and during our meeting we asked why only $2000 when we have heard of others getting as much as $5000 for the keys? He said Fannie Mae only offered $2000 and since our loan was a Fannie Mae loan $2000 was the max.

We moved out and on the 21st day met him at the house. He did a quick walk through, said it looked good. We gave him all the keys and he handed us a check. We walked out, got in our car and drove away. Yeah, I cried the entire time. It was horrible.

Two weeks later it was on the market for $218,500. I was confused.. why $218,500 when in May it only appraised for $186,000? I realize the bank was trying to recover as much as they could but at some point I can't help but to think how greedy they are also since they get subsidized from the government and if your loan included PMI's don't they get paid from the insurance company too? After all, PMI is mortgage insurance you pay for to protect the lender should you default on your loan! Plus they get the house back and get to sell it again! Seems like they are raking in money hand over fist on forclosures since most of the people who got those creative loans didn't have 20% down and had to pay PMI's.
Sorry I got off topic.. guess I'm just venting.

I look forward to buying a house again and I'm anxious. I find myself looking at properties (online) and although I want our economy and the housing market to get better on one hand, on the other I must admit I'm hoping the market stays depressed and declines even further so that when we are eligable, we can get a great deal. Sorry for saying that, I know it sounds selfish. Apologizes.

Anyway, good luck to everyone out there who is struggling with their short sells, etc. I can tell you all from experiance.. when it's finally over it's really not over. This whole thing left me wondering many times if I was going to come through it still married. We are past that part now but I am consumed with buying again.

Good Luck

Lorrie

[lorrieduke]

Just wondering something... I have noticed that there are a lot of short sells on the market right now. Does that mean that most of them will end up in forclosure if they don't short sell the property and do you have to fall behind on the payments to qualify or have some sort of a hardship? Or can you just ask the bank to allow you to short sell if you can still make the regular payment? What qualifies you or can anyone do it?
I'm just curious since there are so many short sells on the market if that would be an idicator of forclosures to come?

[HHM]

Just wondering something... I have noticed that there are a lot of short sells on the market right now. Does that mean that most of them will end up in forclosure if they don't short sell the property and do you have to fall behind on the payments to qualify or have some sort of a hardship? Or can you just ask the bank to allow you to short sell if you can still make the regular payment? What qualifies you or can anyone do it?
I'm just curious since there are so many short sells on the market if that would be an idicator of forclosures to come?

Fall behind, no. Hardship, Yes.

In practice, most banks won't entertain a short sale unless the homeowner falls behind, but falling behind is technically not required. However, there does need to be some sort of hardship.

So, in reality, most of the advertised short sales are heading to or already are in the foreclosure process.

[lorrieduke]

WOW, that's scarey. I think there are close to a thousand short sells on the market in my town right now. To think that most of them are close to forclosure or already in that process, for me is a reality check to how bad things really are in the market.
One more question... What are some of the possible reasons short sells with contingencies remain in that process for months and some even a year later have not closed escrow? One realator told me they can postphone a forclosure by using a shadow buyer with steller credit etc. who places a bid but later withdrawls it. She told me they can continue that process indefinetly. Sounds bad to me and almost criminal since they already know in advance that the shadow buyer is not someone who is really interested in purchasing the property.
It makes me uneasy to think they are still participating in "shady" activity.

[Sweetpea3829]

Wondering if anybody can answer a few things for me.

We were discharged Chapt 7 in April of 2007. IIB was the mortgage for the property that we are currently living in. We *thought* we were still on the hook for the mortgage as the bankruptcy was to relieve us of the debt from a second property (a multifamily) that we owned at the time and that had caused serious financial issues when we had multiple tenant evictions.

So from 2007 on, we continued to pay on the mortgage for this property that we still live in. We found out in 2009 that it had been IIB and not reaffirmed and what this meant for us. That it would never report as a positive on our credit report, despite our on-time payments, that the bank could come and repossess the property any time, and that we had no legal liability for the loan.

We continued to pay the mortgage, on time, through 2009 and most of 2010. Property taxes went up causing a $400/month increase in the mortgage payment, I lost my job and we still struggled along, staying current, but really struggling to do so.

We filed for a modification in April of 2010 and were dragged along by Citi for FOUR months. For weeks, they promised repeatedly that we would begin our trial payments within another week or so. The trial payments would have dropped our payment by about $700/month. August rolled around and we received official word that we were denied the modification on two grounds...1) We'd never been late and therefore were not at risk of default and 2) we had too much in liquid assets. The kicker was that much of the money they were counting as liquid assets isn't actually ours. We had right around 6k overall in the bank...$2k of that was a mortgage payment that had yet to clear, $1500 of the 6k was comprised of tenant security deposits (the house is a multifamily) and almost 1k belongs to our 5 yr old daughter, but because her account is titled in our names, it was counted as part of our liquid assets.

So we were denied both HAMP and an in house modification.

So we stopped paying. The house is 100k underwater and at this point, to continue to dump money into it would be a poor use of financial funds. It's a toxic asset, essentially.

We had thought perhaps they would modify the loan, but they have not even contacted us at all...and last check, foreclosure proceedings haven't even begun.

In the meantime, my husband has been offered a job that requires us to relocate almost 8 hours away. We were hoping to purchase a single family home as houses out there are VERY inexpensive. The bottom line is that we cannot obtain financing (FHA, conventional, etc.) until our names are off of the deed for this property.

We are specifically pursuing a USDA Rural Development loan. I've spoken with some of the senior loan people (all of whom are fascinated by our situation) and they are pretty positive about our ability to be APPROVED for a USDA loan. But...and this is a big but...we cannot close on a USDA mortgage if our name is on the deed for another property.

We have to get rid of this house we own, and fast.

I contacted the servicing lender to see if we could do a deed in lieu. They stated we need to list the property for three months in order to qualify for a deed in lieu.

As I mentioned, the property is severely underwater...so listing the property means it'll have to be a short sale.

Any thoughts on this? Should we push and market aggressively and try to get the short sale done? Or should we just let it sit on the market for three months and then push for the deed in lieu?

If the property short sells, all of our ties to the property are completely severed, correct? We will have no deficiency judgements, no tax issues, right?

What are the costs to us, involved with selling the property at short sale?

Any ideas how long a deed in lieu will take?

The lender is Fannie Mae...the loan servicer is Lender Business Process Solutions (transferred from Citi). Can I contact Fannie directly and angle for a deed in lieu now?

Any suggestions to get the property out of our names more quickly? We absolutely cannot let it foreclose or we will not be able to obtain USDA financing for three years.

We owe 260Kish, the property is valuing on zillow for 150kish and a house up for short sale across the street is listing for 150k. Their house is similar to ours but in tougher shape. It does have more rental units though.

Thoughts?