Confused - Bankruptcy vs. Foreclosure

[louisville]

I've been reading this forum for a while, and everyone seems so helpful. Hopefully, someone can help me!

I went to a bankruptcy lawyer a couple months ago. I had lost my job (I now have a new, lower paying one), but my main problem is my house. The mortgage is more than I can afford (I blame my own stupidity), and the house is a money pit. I have had it for sale since the beginning of July, and my realtor is awful. She has had no contact with me all these months. I asked her to do a short sale after a couple months, but she's been unresponsive. I still have another month left on my contract with her.

Anyways, the lawyer told me to just let my house go into foreclosure since my other debts aren't excessive (I only have $3000 of cc debt). He said that in his experience the mortgage companies rarely come after the borrower for what they owe.

I actually felt better after that meeting. However, I started researching and found that the IRS see the forgiveness of debt as income. There is no way I can handle an income tax bill for tens of thousands of dollars. So, I consulted with another attorney who suggested I ask for a deed-in-lieu. Of course, convincing the mortgage company to do that may not be easy.

Does anyone have any advice? I'm too scared to make a decision right now. I had excellent credit until the house became too burdensome. Now, I don't know what lawyer is right, or if I should go ahead and file bk (I pass the means test). Help!

[BassBoy]

FYI, there are no tax implications when you discharge the mortgage in BK. You would probably have to claim the forgiveness of debt if you did a Short Sale, but coming after you for the deficency (by garnishments) if you allow the home to go to foreclosure depends on what state you're in. Short Sales and DIL's can be difficult, especially when there are mulitple liens (i.e., Home Equity Lines/Loans).

[BKcrazy]

DIL would get a 1099 too...A real estate attorney told me that.

[uofaguy]

Hi Louisville -

Given the collapse of the real estate market many of us are currently, or soon will be, in your shoes. A couple of thoughts . . .

1) I would not worry about your contract with your current realtor. People hire & fire realtors before existing contracts are up all the time. You could speak with another realtor about your situation and they can advise you on the proper way to move forward, if you feel it will be helpful. There is no excuse for a realtor's unresponsiveness. However, in this market, I wonder if another realtor would even be able to sell the home (in our area no homes are selling).

2) The prior posters are correct - you can be subject to a 1099 with a short sale or a deed-in-lieu and that is why many are filing BK.

3) I too have heard that banks seldom pursue deficiency judgements. It does depend on your state (as some states have anti-deficiency laws), as well as whether the lender feels they could actually get something from you after incurring the cost of pursuing the judgement (another question is, does your state allow for wage garnishment, etc).

4) I have tried to work with the banks for many months to short sale or deed in lieu our home - to no avail. The banks would not allow a deed in lieu (as there are 2 mortgages held by different companies) and I had a short sale offer, but bank #2 insists on the right to pursue a deficiency judgement. That is ridiculous to us and we are not agreeing to that term. The frustrating thing for me is that the minute I knew we were in financial trouble, I phoned the banks and they told me they would not work with us until we were 2-3 months late. By that time, my previously excellent credit was now sunk.

This forum has a ton of info. As others suggested to me, you may want to meet with 5 or 6 different BK attorneys (maybe even some that also specialize in real estate in your area) for free consultations to get their perspectives.

Good luck.

[tay666]

Also, you haven't mentioned if you are upside down on the house or not.
In other words do you owe more for it than it will sell for?

If it is close, they may not bother coming after you if you let it forclese.
If there isn't a huge deficiency balance, it may not be worth their time.

[louisville]

I'm upside down by a couple thousand. I'm not worried about the deficiency so much as the tax implications and the fact that the bankruptcy attorneys I've talked to don't seem to be aware of this.

[HHM]

Look at IRS From 982
and IRS Publication 908

[louisville]

So, filing for bankruptcy is my best bet? I don't understand the IRS forms. I really have no assets, but I've heard insolvency is difficult to prove.