Short Sale versus Foreclosure versus Renting House Out - Need Advice/Options

[OweTooMuch]

Hi - I have been reading this site for years and I need some advice on my situation.

I have a house in my name alone (mortgage/title) for both mortgages. I have been in this house for 15 years. I got married 4 years ago. My husband and I do not have any joint credit and I have all the bills in my name. He has some minor bills in his name alone.

We were planning on buying a new house (qualifying for both) and then renting out my house at a loss each month. I am scared we won't get good renters and will end up losing the house and then they will come after me for the deficiencies and attach the new house that we would own together.

My house and bills are causing quite a bit of problems between us as the neighborhood has become unsafe and he doesn't want our children to go to school in this area so now the kids are going to school 25 miles away by his work. I work 50 miles away and the kids can't go to that school district as they don't take out of district transfers.

I don't know if it is better to divorce and have him go buy his own house and then I take care of dealing with my house on my own.

Specifics:
1st Mortgage - $266,000 (Payment $2300)

2nd Mortgage (HELOC) - $50,000 (Payment interest only $199)
**HELOC taken after I was married but setup as only my loan

Present Value - $200,00

Note: Both loans have been refinanced so no longer purchase money only.

Market Rent for Area - $1700

Location: California

I just read that with the new law SB 458 that if I short sell my house then all deficiencies are forgiven than having a foreclosure. How plausible is this? I don't believe the lender will even allow a short sale since I am married. My husband has been unemployed for 6 months but is going back to work in a few weeks.

This house has caused a huge rift between us. What are my best options? I had spoken to an attorney a while back when husband was still working that said we would have to do a Chapter 13 with 100% payback so we decided that is not an option. I don't know if his unemployment for the last 6 months would make a difference now.

The attorney said I could not do a bankruptcy on my own as the trustee would look at the income from my husband and that is credit would be impacted too.

I could really use some advice before I make the wrong move.

[LadyInTheRed]

I had spoken to an attorney a while back when husband was still working that said we would have to do a Chapter 13 with 100% payback so we decided that is not an option. I don't know if his unemployment for the last 6 months would make a difference now.

The attorney said I could not do a bankruptcy on my own as the trustee would look at the income from my husband and that is credit would be impacted too.

I could really use some advice before I make the wrong move.

Your husband's six months of unemployment may make a difference in calculating your Chap 13 payment. But, if at the time of filing he has already started working again or will definitely be working, his expected salary would probably be taken into account. You can file bankruptcy on your own, but your husband's income is included in the calculation of your DMI, except for any portion he does not contribute the the household. Your husband's credit would only be impacted by your BK if you have credit in your joint names. I filed alone over a year ago and there is no mention of it on my husband's credit report.

This is the first I've heard of SB 458, so I just read a bit about it. It sounds like the 2nd mortgage holder still needs to consent to the short sale in order for you to be safe from a deficiency judgement. If you can get both mortgage holders to consent and you can handle any other debt you have, a short sale sounds like a good option. I bet you'll have trouble with the second mortgage holder. If both mortgages are with the same bank, you may have a better chance. Find a real estate agent with experience with short sales and see what they can do.

I don't know why you'd want to rent out a house that is underwater and has a higher mortgage payment than you could collect in rent. If you can't do a shortsale, it may make sense to file BK and let the house go. But, we don't have enough information to say for sure it is your best option. I suggest you consult with a couple BK attorneys other than the one you talked to before. Check my blog for a link to a spreadsheet that might help make consultations more productive. I emailed it to 3 attorneys before my consultations and they all ran the means test before I met with them.

I suppose divorcing is an option. But, I'd explore other options first if BK is the only reason you are considering divorce.

[OweTooMuch]

Hi LadyInTheRed,

Thanks for responding to my posting. It helps to have an objective person look at my situation for me. I also have about $32,000 in credit card debt not counting my car which I need to keep to get to work in.

I guess it does not make sense to keep the house as a rental. It would be a lot of extra work and expense when I really look at this.

My attorney's assistant keeps saying that the BK is going to go on my husband's credit report but we don't have one shared account so I cannot understand this. My mortgages are not with the same bank. I have LBPS for the 1st and a credit union for the second. I am very wary that I will be able to successfully short sale my house and get them both to agree. If it goes to a foreclosure then I know the 2nd will come after me for their money.

If I stop paying before I file BK then I think they will say I make too money to file BK without a mortgage. I guess if I just foreclose there could be a tiny chance the HELOC lender won't come after me? Or, is this just a pipe dream? I am going to go talk to an attorney next week on this. I tried to download your spreadsheet but I think the link is broken.

Again, thanks for your response. It really helps to get input from others.

[LadyInTheRed]

My attorney's assistant keeps saying that the BK is going to go on my husband's credit report but we don't have one shared account so I cannot understand this.

From my own experience and from everything I've read on the subject, I think the attorney's assistant is wrong. If you ask the attorney directly, you may get a different answer. If you do, be sure to let the attorney know that the assistant is giving incorrect information.

My mortgages are not with the same bank. I have LBPS for the 1st and a credit union for the second. I am very wary that I will be able to successfully short sale my house and get them both to agree. If it goes to a foreclosure then I know the 2nd will come after me for their money.

If I stop paying before I file BK then I think they will say I make too money to file BK without a mortgage.

I am pretty sure you can still list the mortgage payment on your means test if you stop paying, but get advice from an attorney before you stop paying. In any case, they aren't going to tell you that you make too much to file. You might have too much DMI to file a Chap 7 (have you tried the means test at http://www.legalconsumer.com/bankruptcy/nolo/?). If your income is high enough, you could end up in a 100% Chap 13, but there is no maximum income to file a 13. It just may not make sense to file a 13 if you have enough income to pay off your unsecured debt within 5 years (including any deficiency on a foreclosed mortgage) while keeping up on your secured debt payments.

I guess if I just foreclose there could be a tiny chance the HELOC lender won't come after me? Or, is this just a pipe dream?

I guess there is always a chance, but I wouldn't count on it. Whether it's the original creditor or somebody who buys the debt, somebody probably will eventually come after you for the deficiency. You could wait until they do and then try to settle for less than the amount due. If settlement doesn't work, you can then file bankruptcy. If you do decide to try to settle, make sure you understand the income tax consequences of a settlement.

I am going to go talk to an attorney next week on this. I tried to download your spreadsheet but I think the link is broken.

Maybe they don't keep the file for long. I uploaded it again. http://www.filedropper.com/bkinfoform

I recommend you talk to more than one attorney. You may get different opinions. If the opinions conflict, come back and post about it so people here can help you sort through it.

Again, thanks for your response. It really helps to get input from others.

Your welcome. Most of what I know about BK I learned here. I'm just paying it forward.