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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29581
Experience:  Taxes, Immigration, Labor Relations
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I have to sell my home in Colorado. The comparables in the area are $20,000 less than wha

Customer Question

I have to sell my home in Colorado. The comparables in the area are $20,000 less than what I owe. I am not behind in payments and am moving/retiring September 1 to another state. I will be retiring in July making only $900/month. I have $3,900 credit card debt, $25,000 deferred student loan and $35,000 in my 401(k). Do I file bankruptcy? Foreclose? Short sale? Sell? How will this affect my social security and 401(k)? How do I pay off the remaining balance if I do sell? I live in Colorado currently.
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
Hi and welcome to our site!While housing market shows some improvements - unfortunately in many situations taxpayers owe more than the property value.The first step would be to negotiate with the creditor regarding the short sale. If the creditor agrees - you will likely have the difference ($20k) forgiven - and the bank will issue form 1099C reporting that amount.If the creditor woudl not agree on the short sale - you might want rent the home instead of selling.Of you woudl need to bring $20k on closing to pay off the difference.Neither will affect your social security benefits or 401k plan - unless you will start distributions. If you do take distributions from 401k plan - it might be better to spread distributions over several years to avoid higher tax brackets.
Customer: replied 2 years ago.
Renting the property would not be an option because I would have to make up the difference on that as well. With my Sosa security I could not cover that either. But I need an attorney to do the short sale? Any other suggestions if the short sale does not work?
Customer: replied 2 years ago.
What about my student loan? Can they attach my Social Security benefits to collect that?
Customer: replied 2 years ago.
If I do a short sale do I stop making my payments now?
Expert:  Lev replied 2 years ago.
Appreciate your response.
You do not need an attorney to conduct short sale. However - the mortgage holder must agree on the short sale. That is regardless if you continue mortgage payments or not.
Your realtor who conducts the sale will be able to instruct you on specific steps.
If you stop making payment - the mortgage holder will eventually foreclose on the property - that will have essentially the same effect as a short sale - but your credit score will be more affected.
To foreclose - it woudl be more expensive for the mortgage holder.
So short sale - generally could be better option for you and for the creditor.
The student loan should be negotiated. Similar to any other debt. If you are on the payment plan and current - nothing will be garnished. However - if you default or ignore collection notices - potentially - your income and assets may be levied.
Specifically - up to 15% of your social security benefits may be garnished to satisfy the past due student loan.
Customer: replied 2 years ago.
If they won't accept a short-sale, would bankruptcy be the next step rather than waiting for a foreclosure? That would clear up my student loan as well and my home is/was my only asset (except for my car and 401K). Would bankruptcy affect my 401(k). I'm just trying to figure out the best way to take care of this and get it out of the way since I will be retiring. Not too worried about my credit rating as I am not planning on making any further major purchases. What would you suggest to your client? I need some guidance on the best way to go that won't affect my small retirement money.
Expert:  Lev replied 2 years ago.
Filing for the bankruptcy protection is definitely an option...
However - that might take longer that foreclosure... and will damage your credit more severe.
Still a short sale would be the best option if you have no way to come up with additional $20k.
Please be aware that the student loan generally may not be cancelled via the bankruptcy.
And 401(k) assets are protected.
The bankruptcy generally should be viewed as the last resort...
I would suggest to contact a real estate agent - and explain the situation - that you are looking for the short sale.
The agent will suggest the sale price - and you will try to get pre-approval from the creditor.
Still - you will have your house listed for sale with a short sale option - so potential buyers will know that the approval from the creditor is required.
If the creditor disagree with the short sale - you will likely stop payments and ask them to foreclose.
That what I would suggest...