Does Foreclosure Require Filing Bankruptcy?

[Hillbilly]

Multiple refinancings over the years have left us with very little equity in the home which we have owned for the last 31 years.
The reduced income of retirement, and the sluggish Michigan economy, (few jobs that we are qualified for, or are physically capable of performing) have resulted in us now having a mortgage payment that we simply can no longer afford. That's the bad news.

The good news is that while our credit was still very good, and we were able to purchase a much less expensive home in another state, (in a town where the majority of our family already resides) and where our estimated monthly expenses will be only about one third of our present location.

Almost all of our debt is secured by our Michigan residence, A first mortgage and a Equity Line of Credit, totaling about $180,000, both through the same lender. (obtained on a 80% LTV ratio)
We have missed the last two payments on both loans, and just received our first letter threatening foreclosure.
Here are the questions,
We DO NOT want to keep the house, Can we just let them foreclose and walk away?
Is there any likelihood of them pursuing a deficiency judgment?
(our income is small, and the mortgage payments take up about 70% of our monthly income, we are (were) struggling)
Do we need to file Chapter 7 ? (we have less than $7000 in debts not secured by our residence)
Should we file BK before they foreclose? or wait to see if we will be hit with a deficiency judgment or a big tax bill?
Any other observations or advice will be appreciated.

[Jenny]

How did you purchase another home with an existing mortgage payment equal to 70% of your income?

[Bobby'sGirl]

Their credit rating is probably high enough for the new lender.

Plus if they jetison the old home, income will be adequate to cover living expenses in the new place, as the poster mentioned in his paragraphs of info.

Welcome to the board HB, and I've included some of my personal experiences in a private message for you.

[Hillbilly]

Yes, we had very good credit, and our loan application was approved within 24 hours.
The out of state house is in my wife's name only, and based on her income, she has been self-employed for about twenty years.
Problem is, her business is seasonal and her total income for the year is generated within a three month time-span.
The 70% figure estimated above was based only on my monthly pension check (just did an exact calculation, and the payment on our old house actually takes up 81% of my pension)
Of course, the lenders naturally used her reported income for the last 3 years as the basis of her (our) ability to repay, and also relied our expressed intent and promise to also divest ourselves of our Michigan residence.
However, as we are both getting up in years, and neither of us are in perfect health anymore, it becomes increasingly obvious that we will not be able to continue to carry on this high stress and labor-intensive seasonal business for many more years. Additionally Michigan's sputtering economy does not bode well for our future business prospects, we simply cannot count on maintaining profitable operations.
Also contributing to this decision was three immediate family members all losing their long-time jobs within the previous 6 months, they intend on relocating with us.

So we were faced with another 28 years of high mortgage payments, well into our eighties. Bottom Line, we either got out now, while our credit was still good, or would be losing everything in the very near future anyway.

[keepmine]

Your first post stated you have some equity in the home. Why not try and sell it?

[SinkingFast]

BK and Foreclosure are 2 seperate entities. If you let the house Foreclose and then decide to BK for the deficit balance and your other debts, you'll have a double whammy on your Credit. A Foreclosure AND a BK.

If you Foreclose, you may be hit with a deficit balance, or the Lender may forgive it. Deficit balance, you still owe and are obligated to pay. Forgiven debt, you incur tax liable income and you'll have to pay Uncle Sam and your State.

I found this website that has some info on what you may be facing.

http://www.realtytrac.com/foreclosur...State=Michigan

Michigan foreclosures are primarily handled out of court. The foreclosure process can take 3-14 months depending on the length of the redemption period. The typical foreclosure takes about eight months.

Pre-foreclosure Period

Court foreclosures are permitted in Michigan; however, most mortgages contain a clause enabling a lender to sell a property out of court once a borrower defaults. While Michigan law does not require that a lender send out a default notice to the borrower before scheduling a foreclosure sale, the mortgage may require the notification. The borrower's right to stop the foreclosure by paying off the default is also dictated by the mortgage.

Notice of Sale / Auction

The foreclosure sale usually occurs about two months after the lender starts the foreclosure process. A notice of sale is published once per week for four weeks in a local newspaper, and the sale may not be less than 28 days from the first publication date. The notice is also posted on the property during the publication period. The notice of sale must contain the lender and borrower names, mortgage information, the default amount, a legal description of the property, and the length of the redemption period.

A trustee or sheriff conducts the public auction between 9:00 a.m. and 4:00 p.m., usually at the county courthouse. Anyone may bid, and the property is sold to the winning bidder. The sale may be postponed by posting a notice of adjournment at the time and location of the sale.

The person conducting the sale completes the necessary documents to transfer ownership to the winning bidder at the sale, and those documents must state the redemption expiration. The redemption period varies, but typically runs six months from the foreclosure sale date. During this time, the borrower can redeem the property by paying the winning bid amount and applicable costs.

Since you've missed 2 payments already, your Lender could already be moving your mortgage toward Foreclosure and you wouldn't even know. Depends on how your mortgage is written. You need to pull it out, dust it off, and read thru it.

Lenders don't like to have Foreclosures on their books anymore than borrowers don't want to sell their homes. You need to contact your Lender ASAP, let them know what's going on, and see what alternatives they may work out with you to sell the property.

[Hillbilly]

Your first post stated you have some equity in the home. Why not try and sell it?

Several reasons, having occupied this place and raised our children here, over the last three decades we have accumulated a considerable collection of items precious to our family. To prepare the place for showing and sale, and to obtain a good offer, will first require moving a considerable quantity of our possessions over 500 miles to our new residence. This will require both time and a substantial ongoing financial outlay.
Also the local housing market is not at its best right now, as the largest local factory in this small town has just announced it will be closing and eliminating over 400 jobs, so there is no rush to purchase homes here, because of the expectation of an oversupply and falling real estate values.
This is a small community and most buyers who would be interested in our property are aware that waiting for the upcoming foreclosures will make almost all homes available at a considerable savings.
Also we are about to enter our 3 Month seasonal business period, wherein we travel extensively and will seldom be at home or available, so there is simply insufficient time for us to move, prepare and market the house prior to the lender foreclosing. There are also other reasons, but these alone are sufficient to preclude efforts at selling.

[Hillbilly]

BK and Foreclosure are 2 seperate entities. If you let the house Foreclose and then decide to BK for the deficit balance and your other debts, you'll have a double whammy on your Credit. A Foreclosure AND a BK.

Would Foreclosure followed by Bankruptcy be more of a whammy than a Bankruptcy followed by Foreclosure? Just seems that either way would result in the same double whammy?

If you Foreclose, you may be hit with a deficit balance, or the Lender may forgive it. Deficit balance, you still owe and are obligated to pay. Forgiven debt, you incur tax liable income and you'll have to pay Uncle Sam and your State.

Not really too worried about a Deficit balance, as Michigan has a "fair value" rule that applies in "Foreclosure by advertisement", the method of foreclosure most commonly used here. (as Judicial Foreclosures can take years)
"Fair Market Value" is the what the house is worth and is essentially the same as the appraised value, this is why I mentioned the 80% LTV, the lenders made loans totaling $180k on acceptance of the premise that the property had a VMV of $225k, If they were to accept less than $180k at the Foreclosure auction it would be difficult for them to prove any claim that the secured property was worth significantly less than than a mortgage balance that was by their calculations for 80% of Fair Market Value.
The lender was willing to employ this "paper" value to maximize the loan amount and potential profit.

This leaves the "Taxable Income" liability as my primary remaining concern, Is it common for the IRS to pursue collecting huge tax amounts from people who have lost their homes to foreclosure?

If one doesn't have enough income to even keep their home, do they need also fear the IRS taxing them for simply being poor?
If the IRS does attempt to collect tax on the "income" (sic) from a foreclosure, (thus far, I've seen no one complaining of this actually happening to them) would filing Bankruptcy cancel this tax debt?
Is the filing of Bankruptcy then a requirement only to keep the Tax man at bay?
In the newspapers I see 200-400k mortgages in foreclosure, do all of these folks end up paying "income" tax on the loss of their home?

With all of the thousands of foreclosures that have been going on in Michigan, it seems that someone reading this ought to have some first-hand experience.

[SinkingFast]

You're kinda confusing issues here.

Forgiven Debt is totally different than Discharged Debt.

Forgiven Debt,.......... You sell the house for less than you owe. The Lender decides out of the goodness of their heart that they are not gonna require you to pay the $20K deficiency. The debt is Forgiven. Charged off the books. But the Lender reports the Forgiven Debt to the IRS and issues a 1099 statement to you. THEN it's tax liable income.

Whether you file BK before or after the Foreclosure makes no difference really, as far as the Debt goes.

If you file BK and you think a Foreclosure might happen in the future,...........You can choose not to reaffirm your mortgages. All the mortgage debt is discharged in your BK. You are no longer responsible for one penny of the mortgage.

If you are Foreclosed upon before you file BK, you can simply discharge the deficit balance due during your BK.

The tax liable income comes in if you do not file BK. If you Short Sale, or you're Foreclosed upon and the Lender does not sell the property for as much as you owe. The Lender can choose to "forgive" the deficiency instead of requiring you to pay. If the Lender "forgives" the deficient balance, then that money becomes tax liable income to you.

BK discharged debt is not tax liable. Forgiven debt is tax liable.

BK with a Foreclosure before or after, either way, there's no tax liability on the deficit balance as long as you list the debt for discharge.

You also need to understand how a Foreclosure Sale/Auction works.

The Lender won't accept less than what's owed at Foreclosure Auction on the Court House steps. The Lender will take your $180K, and add penalties, and fees, and legal costs to sell the property on top of the $180K. The actual number owed at the time of sale will be greater than your current $180K principal balance.

The starting price of the sale at a Foreclosure auction is preset. It's not a full, all out bidding war that starts at zero. The auction will open at what ever you owe, as calculated by the Lender. Most Foreclosure auctions take only a few minutes. Most of the time spent reading the legal description of the property.

There are usually very few bidders there. Generally investors who all know each other, looking to pick up a deal to parlay into a profit for themselves in one way or another. Rarely, a regular person, such as us, will show up to bid on a home in a Foreclosure Auction. At many Foreclosure Auctions, only one person attends. The representative of the Lender.

The day of the Foreclosure Auction, the Lender's representative will be bidding in the auction along with any interested bidders. Generally, the Lender has the highest bid and "buys back" the house at auction to sell at a later date. If a qualified, willing buyer, bids more than what is owed on your property, the Lender will defer to the other person and allow your house to sell to another bidder. The Lender gets their money and somebody else winds up buying your house.

[Hillbilly]

Thanks for the clarification,
If I understand the above correctly, the IRS will not forgive 1099 "foreclosure
income" unless a BK is filed, and to avoid this "income" tax, it will be necessary for me to file for BK at some point.
If we wait to see if a 1099 is issued, can it then still be voided by filing for BK?
Foreclosure in this instance seems unavoidable, as there is no way that we can continue to afford this mortgage, a short sale appears a waste of effort as the attending tax obligation would still bankrupt us, leaving us with essentially no credit to protect.
We have no savings of any description left, our only assets being personal belongings, the wife's business (consisting principally of her skills, and contacts, not "hard" assets that could be sold to satisfy creditors)

However, it appears that allowing the foreclosure to proceed without first filing BK will provide a protracted time-frame in which to relocate, and transfer our few remaining assets from non-exempt into exempt categories.
We will be contacting a BK Attorney with experience in our locality.

[Hillbilly]

Please forgive my dumb questions,
Is the 1099 tax based only on the "forgiven" difference between the price that the lender eventually recieves upon sale of the property, and the unpaid mortgage balance + expenses? This we could manage.
I was under the perhaps mistaken impression, that the entire defaulted 180k would be counted as taxable income - no way we could afford that.

Our concern for avoiding filing for BK if possible, has been the risk and worry that my wife would be required to surrender to the BK trustee for sale, the vehicles and equipment that are necessary for her to continue her self-employed small business, all of which are owned free and clear. (having a total value of under $10,000)

[BassBoy]

If a vehicle or equipment are for "tools of the trade" then I believe those are exempt. I also believe that the 1099 would be for the deficiency balance of the mortgage.

[chrisblanks]

Equity

Multiple refinancings over the years have left us with very little equity in the home which we have owned for the last 31 years.
The reduced income of retirement, and the sluggish Michigan economy, (few jobs that we are qualified for, or are physically capable of performing) have resulted in us now having a mortgage payment that we simply can no longer afford. That's the bad news.

The good news is that while our credit was still very good, and we were able to purchase a much less expensive home in another state, (in a town where the majority of our family already resides) and where our estimated monthly expenses will be only about one third of our present location.

Almost all of our debt is secured by our Michigan residence, A first mortgage and a Equity Line of Credit, totaling about $180,000, both through the same lender. (obtained on a 80% LTV ratio)
We have missed the last two payments on both loans, and just received our first letter threatening foreclosure.
Here are the questions,
We DO NOT want to keep the house, Can we just let them foreclose and walk away?
Is there any likelihood of them pursuing a deficiency judgment?
(our income is small, and the mortgage payments take up about 70% of our monthly income, we are (were) struggling)
Do we need to file Chapter 7 ? (we have less than $7000 in debts not secured by our residence)
Should we file BK before they foreclose? or wait to see if we will be hit with a deficiency judgment or a big tax bill?
Any other observations or advice will be appreciated.

Hello How much do you owe on the house? and how much is the house worth?

[JeepMom]

To prepare the place for showing and sale, and to obtain a good offer, will first require moving a considerable quantity of our possessions over 500 miles to our new residence. This will require both time and a substantial ongoing financial outlay.

So you're letting your memories get foreclosed on? I'm confused.

[SinkingFast]

And now I'm confused.

Do you have 2 residences, Hill??

It really doesn't matter whether you file BK before or after Foreclosure. The deficit balance will be discharged either way.

File before, and you discharge the entire mortgage note and all financial responsibility to the property. What the Lender does with the property after that is not your concern or responsibility.

File after, and you discharge the difference between what you owed and what the property sold for. Either way, you're not responsible for the debt.