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LawGirl, Lawyer
Category: Real Estate Law
Satisfied Customers: 4606
Experience:  I am familiar with this area of law.
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I live in California. Im considering short selling my house

Customer Question

I live in California. I'm considering short selling my house due to a pending divorce. My fear is that 1.) The bank may still come after me for the deficiency (part of the debt is a HELOC), and 2.) The IRS/State Franchise Tax Board will consider the forgiven portion of the debt as income and tax me for it.
Is foreclosure a lesser of the two evils?
Submitted: 6 years ago.
Category: Real Estate Law
Expert:  LawGirl replied 6 years ago.

LawGirl :

Thank you for your question. Was the HELOC taken out at the time your purchased your home?

JACUSTOMER-wcqne3sk- :

No. It was a refinance.

LawGirl :

Thank you for providing that clarification. Under California law, a lender cannot pursue a borrower for a deficiency balance resulting from a first mortgage used to purchase a residence. In California, purchase money loans made on your home are non-recourse. A "purchase money" loan is one where the money went from the lender, to escrow, and then to the seller or to pay purchase closing costs. If the borrower never refinanced and the property is still encumbered by the original purchase money deed, the antideficiency protection remains.

LawGirl :

Your lender will likely be able to come after you for the HELOC debt because it is not covered by the antideficiency statute.

LawGirl :

Fortunately for homeowners in default, you may not have to declare the forgiven portion of the debt as income. Recently California has extended a mortgage forgiveness tax law that allows taxpayers to exclude canceled mortgage debt on their principal residence of up to $500,000.

LawGirl and other Real Estate Law Specialists are ready to help you
Customer: replied 6 years ago.
Would a short sale be preferable over the foreclosure in terms of the deficiency liability?
Expert:  LawGirl replied 6 years ago.
If you can get the HELOC lender to sign off or agree to the short sale, then it likely would be a better alternative. In the event your HELOC lender agrees to the short sale, they would be agreeing not to take a deficiency judgment against you.