Rental property in a chapter 13

[mopar]

This is a loaded question, but I'll try to be concise and brief.
We are filing a Chapter 13 (under $8,000 in credit card debt, only $2,000 in medical bills, own one vehicle free and clear, 4 payments behind in primrary residence, 5 payments behind in secondary home which we use as a rental property). According to the attorney, our only choice is to surrender the rental property. In the meantime, the sheriff sale has been postponed several times and is now scheduled for 2/26/10. We have someone interested in purchasing the home. Our attorney says 'DON'T DO IT'. Other advisors say, 'why not', as that would minimize our unsecured debt if the outstanding balance is at least covered in the purchase. We are getting mixed messages.

If the house sells for at least what is owed, why would we be responsible for taxes (I'm assuming he means a 1099 will be sent because it will be considered income). However, if the house is sold, won't the bank note be satisfied and all is well and good? I suppose it depends how the bank will report this.

We're so confused and because of the lack of clarity from our attorney (and it taking so long to file the Chapter 13 since December), we have considered dropping this whole plan, sell the rental property, and try to continue to work with our primary lender. HELP! Any advice will be greatly appreciated.

Thank you.

[justbroke]

Here's the kicker with short sales... if that's what you're thinking. They usually don't close. Yes, some do, but the overwhelming majority get dumped by the bank at the last second because they don't like the deal. Especially when you have a second mortgage on the property. You're even unsure of what it would sell for. In this market and climate, it's a buyer's market, and even the few buyers are looking for bargains.

Don't do it, is sound advice. You'll just work yourself up for probably nothing. The "1009-C" or taxes from the sale will come because you still owe a total of at least 9 back payments, that you told me of. They'll tack on late fees, attorney fees, foreclosure fees, and ever other fee that your contract (Note) allows them to tack on. Even if you think it's worth what you owe, you are probably underestimating commissions, title, and recording costs.

Yes, if you sold it, you could reduce the unsecured debt in your Chapter 13, but that may be moot. If your disposable monthly income (DMI) is very low anyhow, it's fruitless to do all that work and gain nothing.

They are all good sound decisions, but your attorney may be the wisest.

[HHM]

Waste of time, DON'T DO IT.

[mopar]

Clarifications

Thank you both for responding so quickly. I understanding the possible fall-out from the attempt to sell the home. However, let me clarify a few things.

I do not have second mortgage on the rental property, and it is 5 payments behind (the 4 payments behind is on our primary residence which we are keeping). The party that is interested in buying the home is willing to offer about $10,000 under what we owe, not a shabby offer at all. I agree that here in Michigan especially, it's a buyer's market. But this individual also realizes the situation we are in and loves the home and wants to purchase it if at all possible.

Our attorney was actually holding off filing our Chapter 13 since December because he wanted to see if the sheriff sale would go through. If that's the case, we all know it would probably have gone for a fraction of what is owed. And although the bank may not have accepted it, he obviously had reasons to let it go before we filed to give us a better plan?

Anyway, this is all so confusing, and we've been mulling this, as I mentioned, since December. We definitely cannot keep the rental property, so we thought trying to sell (above and beyond a 'short sale') could benefit us.

Hope this clarifies a few points. I really appreciate the info. Have a great day!

[justbroke]

It clarifies. I didn't understand that you had an offer in hand. If you have an offer (sales contract) in hand, why not approach the bank. Still remember, it's going to be way short of what you owe (given the "costs" associated with actually selling a home). That's the only thing I can say. The key is, don't spend a lot of time negotiating with the bank. They either want to do it or not.

[mopar]

Thank you!

So hopefully I'm not being redundant, but now my questions is. . .
If the bank accepts, the home sells, will I get a 1099 and have to pay taxes on 'income'? If so, is that part of what is 'protected' in the Chapter 13. Currently, it is set up as us 'surrendering' the property, but we were told we still have rights to any 'equity'. So, in that respect, I would understand if we get something over and above what is owed it would be considered income.

Excuse my ignorance on all of this. All my research still doesn't address our specific circumstances clearly enough. That's why I've been on a 'mission' to figure this all out.

Thank you again!

[HHM]

Here is the one catch with doing a short sale on the eve of bankruptcy.

You will need to review the short sale contract (assuming the bank accepts it) and see what exactly you are agreeing too. This article explains the risk.

http://askmethner.com/?p=1011