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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 38910
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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I have property which a lender received a relief from stay

Resolved Question:

I have property which a lender received a relief from stay on in a Chapter 11 bankruptcy. My bankruptcy attorney informed me that if the lender forecloses by way of a trustee sale, that the lender cannot legally pursue me for the difference between the amount owed on the note and the amount that the property is foreclosed on. My bk plan, which has already been confirmed by the court, states that the debt for the loan will be satisfied when the property is foreclosed on. I just wanted to get a another legal opinion on whether it is in fact true that the lender cannot legally pursue me for the difference between the foreclosed amount and the amount due on the note. The property is in California as is the bankruptcy. I ask because the lender has contacted me and is requesting that I do a deed in lieu with them. Stating that it's in my benefit that the property not be foreclosed on. They may also offer me a waiver of deficiency.
Submitted: 6 years ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 6 years ago.
Under Cal. Code Civ. Pro. 580d, a deed of trust forclosure operates as a bar to a deficiency judgment (exception: FHA or VA loan guarantees preempt California state law).

However, if there is a junior lien on the same property, that lender can sue for a deficiency, because it was not foreclosed (exception: if the junior lien was purchase money, paid to seller in escrow, and the property was 1-4 unit residential, and the loan was made with the intent that it would be owner occupied, then it, too, is barred from a deficiency judgment under Code Civ. Pro. 580b).

In sum, if you have one conventional loan on the property and it is sold by trustee's sale, then no deficiency judgment is possible.

That said, if you give the lender a deed in lieu, then that completely avoids CCP 580b and 580d, because there is no forced sale. Which means that unless you get an unconditional release from liability on the unpaid loan balance, then the lender can obtain a deficiency judgment.

Also, your bankruptcy plan relieves you of some or all of the debt, regardless of any of the above. Exactly how much or on what terms depends on the plan.

Hope this helps.
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Customer: replied 6 years ago.
Socrateaser, you've done it again! You rock!
Expert:  socrateaser replied 6 years ago.
I do rock. Yes. I am the king.

Wait, I don't like peanut butter and banana sandwiches. So, I guess Elvis is still the king.

Happy Holidays.
Customer: replied 6 years ago.
Lol! Happy Holidays!
Customer: replied 6 years ago.
One continuing question-- were I to obtain that unconditional release from liability from the lender on the deficiency amount, would I be obligated to pay the tax on the difference to the IRS for the difference in "funds received" if the original purchase amount for the loan property had been 250k, but the lien amount on the cash out foreclosed on mortgage in question (which was used to pay off the original purchase loan for 250), were 450k? In short, would I have to pay tax on the 200k difference between the purchase money mortgage and the foreclosed on refi'd cash-out mortgage?
Expert:  socrateaser replied 6 years ago.
If your bankruptcy plan lists the debt and makes no provision to pay off this debt, then it will be discharged, and you would owe no tax on the phantom income. IRC 108(a)(1)(A).

If the bankruptcy plan does not include the property at all, then you must be insolvent on the date that the creditor executes the release and cancels the debt, in order to avoid phantom income tax. IRC 108(a)(1)(B).

"Insolvent" means all assets (including retirement accounts, but not Social Security Income) minus all liabilities are less than or equal to zero.

If neither of the above is true, then you owe.

Hope this helps.
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