Question Should I file bankruptcy before foreclosure on rental property in CA (so confused)?

[LeeBennett]

I am so confused on what to do!

During 2009 my job in CA was to be cut by 50%, so I decided to get a new job and ended up in Oregon working for the State. I didn't think about the consequences of moving out of state and rented out my house in Fresno and bought a new house in Oregon, but I ended up having to hire an attorney to get the renters out for non payment (5 months) and that took all of my savings. Put the house up for a short sale, but the realtor says the house is in such bad repair that it won't sell unless I pay for repairs, which I can't afford. And I probably couldn't get a short sale approved by mortgage company anyway now that it is an "investment property".

The bank started foreclosure proceedings in April 2011.

Refinance loan on Fresno House = 207,000
Value of Fresno House = 175,000 property tax assessment, estimate of sale price on my part $150,000 (could be less) = 57,000 extra income for both state and federal
Stopped making payments December 2010
All other debts payed on time.
I qualify for Chapter 7 in both Oregon and California as I make under the median income in both.
Unsecured debt = 16,000
I have no equity in my Oregon house
I have 1 dependent

I'm not worried about paying my unsecured debt until I have to pay my taxes on the 1099c then my payments with state and federal taxes would be more than I can afford, as Oregon taxes are fairly high (about the same as federal) and with my interest in a pension (not getting payments yet) from CA I don't think I will qualify for insolvency.

Questions:
Should I file Chapter 7 before the bank forecloses (California)?
Could I keep the house I'm living in if I file BK?
Could I keep my car worth $ 5,000?
Is it worth it to file BK because of potential taxes? (I am not a fan of BK)

Thanks, Lee

[debee]

If you have been in Oregon for less than two years, you won't be able to use that state's exemptions. You could file bk in Oregon, but you would use CA exemptions. The reason you would still be allowed to use CA exemptions and would not be required to use the federal set is because CA doesn't have a residency requirement.

Since you have no home equity to preserve, you could use the CA system (there are two options) that includes the big wildcard - about 22K which can be applied to any asset. So your car, home, etc would be fine. You can view more about the exemptions here.

If you have been in Oregon for longer than two years, you would use Oregon's exemptions. Not as generous as CA. I think you can protect 3K in car equity. The house would be fine. Before filing bk many people buy new cars with good warranties in order to have reliable transportation going forward.

You don't have to file before the foreclosure in order to discharge a deficiency (non-recourse applies to purchase money loans, and depending on the refinance and use of proceeds you may have lost it) and I believe you have some time in terms of the tax consequences. You can't avoid the capital gains issue.

Only you can decide if bankruptcy is the right business decision for you and your family.

Welcome to the forum.

[AngelinaCatHub]

If you have been in Oregon for less than two years, you won't be able to use that state's exemptions. You could file bk in Oregon, but you would use CA exemptions. The reason you would still be allowed to use CA exemptions and would not be required to use the federal set is because CA doesn't have a residency requirement.

Since you have no home equity to preserve, you could use the CA system (there are two options) that includes the big wildcard - about 22K which can be applied to any asset. So your car, home, etc would be fine. You can view more about the exemptions here.

If you have been in Oregon for longer than two years, you would use Oregon's exemptions. Not as generous as CA. I think you can protect 3K in car equity. The house would be fine. Before filing bk many people buy new cars with good warranties in order to have reliable transportation going forward.

You don't have to file before the foreclosure in order to discharge a deficiency (non-recourse applies to purchase money loans, and depending on the refinance and use of proceeds you may have lost it) and I believe you have some time in terms of the tax consequences. You can't avoid the capital gains issue.

Only you can decide if bankruptcy is the right business decision for you and your family.

Welcome to the forum.

debee, where are you seeing capital gains in his post? He has a retirement he says that accrues interest, but it is protected and he is not drawing on it anyway. Your info was good but I'm confused about this capital gain. His house in OR is safe if he keeps paying on it, but the CA home he should just dump. Too bad it cost him so much to get his renters out. NEVER be an absent landlord. It is always a bad idea. He'd been better off attempting sale when he first left, or just letting it go. 'Hub

[debee]

debee, where are you seeing capital gains in his post? He has a retirement he says that accrues interest, but it is protected and he is not drawing on it anyway. Your info was good but I'm confused about this capital gain. His house in OR is safe if he keeps paying on it, but the CA home he should just dump. Too bad it cost him so much to get his renters out. NEVER be an absent landlord. It is always a bad idea. He'd been better off attempting sale when he first left, or just letting it go. 'Hub

I didn't see it mentioned in his post but he's going to have to look into it because of the foreclosure of the rental. The IRS considers it a disposition same as a sale. He'll have to do depreciation recapture, etc. He refinanced it and if he bought the house before the price run up, there will likely be a tax bill for capital gains.

[LeeBennett]

Debee and Hub thank you for responding to my post, they are helping me think through this dilemma!

Debee, I'm not really worried about a deficiency judgement because California is one of the states that only allows one action, either a trustee sale or a judicial sale and judicial sale is the only way to get a deficiency judgement and the judicial route is very expensive and takes a long time (at least that's what I'm understanding from my research on the net), although if the bank wanted to gouge me I guess they could, but then I would definitely file bankruptcy. What I'm worried about is the taxes on the forgiveness of debt which in my estimation would take me to the next tax bracket and I would owe 30,000 in taxes for state and federal together (based on a deficiency of 57,000 depending on fees and interest). The thought of paying that much in back taxes (this is a lot of money to me as I have no savings to speak of ($1,000) and this would have to be paid with my salary) is very disheartening to me as I was looking forward to being debt free in four years (not including the house).

Also, I looked at the California exemptions page and wonder if the exemption for a house is for the equity amount or total value, (my dependent is my son, my Oregon house is valued at the sale price of 146,000 on Zillow ;))? My only assets to speak of are my house and 9 year old Toyota Highlander with 155,000 miles, all of my personal belongings are old or older.

On capital gains, I thought that since I have lived in the house in CA two out of the last five years that I wouldn't have to pay cap. gains, if I am on the hook for cap gains then I in even worse shape that I thought? I guess I need to talk to a tax accountant!

Hub, yes I agree with you, I should have never rented the house out long distance, but I needed to get up to Oregon in three weeks time and was just thankful that I got a full time job (obviously I was not thinking clearly).

Again thank you both for your thoughts! Lee

[debee]

You're right. If you were living in the Fresno rental for 2/5 then you get the exclusion. Since you described it as rundown, I presumed it was a longterm rental. lol. My bad.

You exempt equity not value, so you're good there.

If it weren't for rentals that I had in the Central Valley (also not where I live) I wouldn't be here now. I hope you benefit from the one-action rule and they use the power of sale clause instead of taking the long route to your back pocket.

Best of luck to you.

[LeeBennett]

Thanks Debee! I have read a couple of articles on the Central Valley being one of the most miserable places to live and that it's economy is as as bad as West Virginia. The only good thing to come out of this is that we're out of there and my son is doing way better in school.

I'm going to talk to a tax accountant asap and also a bk attorney. Your insight has been very helpful!