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LawTalk, Attorney
Category: Bankruptcy Law
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Experience:  I have more than 25 years of experience in the practice of law.
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I own a home I can no longer afford. I cant refinance. Do

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I own a home I can no longer afford. I can't refinance. Do I have to declare bankruptcy? If I get foreclosed do I owe the bank money?

Good morning Lou,

I'm Doug, and I'm very sorry to hear of your situation. My goal is to provide you with excellent service today.

Filing for bankruptcy may be premature, and unless you have a lot of other consumer debt (credit cards, other loans) then you might want to consider other options. Some are better than others, but the three main ones tend to be a short sale, offering a deed in lieu of foreclosure to the lender and then strategic foreclosure. If your property is worth almost as much as you owe, then you might consider a short sale, or offering a deed in lieu.

While you may certainly offer a deed in lieu of foreclosure to your lender, it is rare that they are acceptable by the lender---primarily because the lender is not in the business of buy and selling property---but in making loans and collecting money. It is inconvenient and expensive for them to take over a property and therefore most lenders will reject the offer of a deed in lieu.

Likewise, there really is not a whole lot of benefit to a short sale UNLESS, you can get an agreement IN WRITING from the lender that they will not seek a deficiency judgment from you after the short sale, and that they will forgive the debt.

Other than that, the short sale generally is very time consuming---lenders often will not agree to the offer made by the prospective buyer, even after you bring what you believe is a good offer---if there is more than one mortgage--all lenders must agree on the short sale---you must generally remain current on your mortgage during this period---your credit score will suffer almost as bad a hit for the short sale as it would for a foreclosure. Finally, recently it was determined that the average short sale in the US sold for about 10% below market value---meaning that if your outstanding loan is much higher than about 10% over market value, you may encounter difficulty getting a short sale approved by your lender.

Most people will instead opt for what is known as a strategic foreclosure. They cease making payments on the mortgage and taxes---and bank the money they save during the 6 to 12 month average time it takes the lender to decide to begin foreclosure and when the property is sold at the foreclosure auction for use in relocating.

After the foreclosure is completed, the lender will auction the house. The lender can do one of a couple of things then.

The lender can seek a court judgment against you for the difference between the loan amount and the amount of sale at auction (deficiency). With the judgment, they can attempt to collect money from you; they can garnish your wages or levy on your bank account.

The lender, however, often will not bother to do this though because the collection rate on deficiency judgments are usually not very good --in fact statistically, the collection rates are dismal.

The lender may instead choose, and often does choose, to write the debt off for tax purposes. If they do that, they will send you a 1099 tax form and the loss the lender took (the difference between the loan amount and the amount of sale at auction).

If you were not fully insolvent at the time of the foreclosure---as an example you had $10,000 more in assets than in debts, then while the lender may 1099 you for $100,000, you would only have to pay taxes on the amount that you were above the insolvent level----you would pay income taxes on just $10,000.00.

You may reply back to me using the Continue the Conversation or Reply to Expert link if you need any clarification of my answer.

Please remember to rate my service to you when our communication is completed, so that I will be compensated for my time in providing you with the information you requested. I will be happy to continue further, and to assist you until I am able to address your concerns, to your satisfaction.

I wish you the best in 2013,


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