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cfortunato, Attorney
Category: Bankruptcy Law
Satisfied Customers: 8023
Experience:  Bankruptcy professor.
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I own two properties in CA- my primary residence is worth $250k

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I own two properties in CA- my primary residence is worth $250k and I have $550 owing (purchase money only). The rental property is worth $125K and I owe $300k (this is not purely purchase money loans. I refied both the first and second and took money out on the second). I have about $10k in credit card debt and $30k in medical bills. I have $12k in checking and savings and $80K in IRA accounts. I haven't filed taxes for 2010 but would get about 20K back if I did. If I file chapter 7 what happens to the money in my checking/savings and to my potential tax refund. If I don't file bankruptcy, I can foreclose on the primary residence and walk away clean. On the rental, I would owe taxes on the forgiven debt and possibly have the lender come after me for recourse debt. What is the best option for me? I currently make about $125K per year
Submitted: 5 years ago.
Category: Bankruptcy Law
Expert:  cfortunato replied 5 years ago.

Hi JACustomer,

You may not be able to file a Chapter 7.

1) How many are in your household?

2) Is there any other income coming into your household besides the $125K that you earn? If so, please indicate the source(s) and the amount(s).

Customer: replied 5 years ago.
There are three in the household currently (two kids just moved out last week). I am in a domestic partnership so from a federal perspective I am single. I am the sole income but I do get an additional $1800 in rental income each month.
Expert:  cfortunato replied 5 years ago.

Unless there are extraordinary circumstances - such as high medical bills - it is not possible to file a Chapter 7 if the total gross annual household income exceeds $68,676 for a family of 3 in California. Even if you were able to include the 2 children who moved out, the income limit increases to only $86,364.

Are you sure the Bankruptcy attorney recommended a Chapter 7 and not a Chapter 13?

Customer: replied 5 years ago.

When I met with the attorney (last week)I had a possible $100k in medical bills. This was outstanding and my insurance hasn't been willing to pay. So perhaps that is why she said chapter 7. This week my insurance paid $70k of the debt so I still have an outstanding balance of $30 or so. If I don't file chapter 7 and just go into foreclosure what would the tax implications be on the rental property. Would the lender come at me for recourse debt?


Perhaps I should keep that property and go into foreclosure on the primary residence?

Expert:  cfortunato replied 5 years ago.
Whether or not a debtor can file a Chapter 7 depends on the debtor's income, not on the debtor's debts. Perhaps the attorney was not aware of your income level.
In any event, whether you would have to pay income tax on the difference between what you owe on the rental property and what the property sells for in a foreclosure depends on whether and by how much you were "insolvent" when the property was sold. "Insolvent" means your total debts were greater than your total assets at the time of the sale.

I think this is what you wanted to know. If not, please let me know.
Thank you!
Customer: replied 5 years ago.

When I met with her, I actually told her my income was $150k (higher than the actual). As for the rental, I understand the insolvency rule and think I might qualify for it. I am more concerned about having to pay back the second mortgage on that house. I have two lenders one for the first and one for the second. I assume that on each loan I would go into foreclosure but don't understand how this works out from a recourse vs non-recourse perspective. Any advice on that topic would be greatly appreciated.

Thank you

Expert:  cfortunato replied 5 years ago.

A non-recourse mortgage is one for which the lender cannot get a deficiency judgment for the balance after a foreclosure. A recourse mortgage is one for which the lender can get a judgment for the balance after a foreclosure.

To be a non-recourse mortgage, the loan must have been used to actually purchase the home that was used as the debtor's residence (both qualifications are necessary). Mortgages that are re-financed, and home equity loans that are acquired after the house is purchased do not qualify for non-recourse status.

This means both mortgages for the rental property are recourse mortgages, and the lenders can get deficiency judgments for any balance after the property is sold in a foreclosure.



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