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Category: Bankruptcy Law
Satisfied Customers: 17252
Experience:  14 years exp., CH 7 AND 13 Bankruptcy cases, AFL-CIO UNION PLUS, UFT NYSID AND ALL MAJOR UNIONS
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For tax reasons, do I need to file bankruptcy before foreclosure After

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For tax reasons, do I need to file bankruptcy before foreclosure?

After living in my house since 1994, 15 months ago I moved out and rented it to tenants. I stopped paying the mortgage about 9 months ago. Today the tenant received a notice that the house will be sold at auction on November 30 as a result of foreclosure.

I also have a lot of credit card debt, so filing bankruptcy is likely but not certain.

My question is: to avoid a tax liability for debt forgiveness do I have to file bankruptcy to discharge the debt BEFORE the foreclosure sale, or can I file later, like six months from now?

Hello I am a licensed attorney here to help you with your question, please review my response and do not hesitate to ask for clarification.


The Mortgage Forgiveness Debt Relief Act of 2007″ which states at Section 2.5: "principal residence' has the same meaning as when used in section 121″. ie: of "Principal Residence" shall be the 2 of 5 year Rule set forth in U.S. Code Sec. 121, which would meant that if you have lived in the home for 2 of the last five years you would not owe any tax on the property after the foreclosure. The bankruptcy could be filed after the foreclosure as well and the tax liability would be discharged.

Customer: replied 6 years ago.
Does the same apply to California state taxes?
Conformity Act of 2010 was enacted. It allows taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from California gross income. The new law applies to discharges of qualified principal residence indebtedness on or after January 1, 2009, and before January 1, 2013.

New law - Taxable years 2009 through 2012

California law conforms, with modifications, to federal mortgage forgiveness debt relief for discharges that occurred in tax years 2007 through December 31, 2012. The amount of qualifying indebtedness is less than the federal amount and California imposes a state-only limitation on the total amount of relief excluded from gross income. The following summarizes the differences between the federal and California provisions. Federal provision applies to discharges occurring in 2007 through 2012, and:

  • Limits the amount of qualified principal residence indebtedness to $2,000,000 for taxpayers who file as married filing jointly, single, head of household, or widow/widower, and to $1,000,000 for taxpayers who file as married filing separately.
  • Does not limit the debt relief amount; it only limits the indebtedness amount used to calculate the debt relief amount.
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