Tax Consequences of Foreclosure


C

Cynthia

Hi there,

Thanks in advance for your sage advice.

My friends are likely to file for BK. And, they are upside-down on
their house, and cannot make the full PI payment.

I am trying to walk them through the BK process, we have recently seen
a lawyer that I think they will go with, but he has said he is not a
Tax guy....I get that.

They will have both a Foreclosre and a BK. It seems that it makes
more sense to file for BK then to let the house go into FC. The BK
lawyer explained this was better because as long as they have the
house, their house payments are part of their monthly payments.....and
are extremely high.

He did not give us a definitive answer on the second (eg, 1st is for
500k, 2nd - a heloc is for 100k), house sells for 500k. We are in
California. Could the 2nd do a judicial whatever? Can the second
still go after the homeowners after they have filed for BK and have
foreclosed?

I know we need to see a BK Tax attorney, and we will. Just looking
for inputs.

Thanks, Cynthia
 
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P

Paul Thomas, CPA

Could the 2nd do a judicial whatever?
Can the second still go after the homeowners
after they have filed for BK and have foreclosed?


Both are legal questions. Ask the lawyer.

If you have a tax related question, please ask it.
 
S

Stuart Bronstein

Cynthia said:
My friends are likely to file for BK. And, they are upside-down
on their house, and cannot make the full PI payment.

They will have both a Foreclosre and a BK. It seems that it
makes more sense to file for BK then to let the house go into FC.
The BK lawyer explained this was better because as long as they
have the house, their house payments are part of their monthly
payments.....and are extremely high.
As Paul notes, your questions are legal, not tax related ones, and
should be directed to their lawyer.

Are they talking about a chapter 11 bankruptcy, or chapter 7? That
will make a big difference.
He did not give us a definitive answer on the second (eg, 1st is
for 500k, 2nd - a heloc is for 100k), house sells for 500k. We
are in California. Could the 2nd do a judicial whatever? Can the
second still go after the homeowners after they have filed for BK
and have foreclosed?
Yes, the holder of the second can probably go after them for the money
owed. In fact, if the first was ever refinanced, that lender could
also, in theory, sue for additional damages after foreclosure. The
bankruptcy will prevent that.

Stu
 
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E

Elle

Cynthia said:
My friends are likely to file for BK. And, they are
upside-down on
their house, and cannot make the full PI payment.

I am trying to walk them through the BK process, we have
recently seen
a lawyer that I think they will go with, but he has said
he is not a
Tax guy....I get that.

They will have both a Foreclosre and a BK. It seems
that it makes
more sense to file for BK then to let the house go into
FC. The BK
lawyer explained this was better because as long as they
have the
house, their house payments are part of their monthly
payments.....and
are extremely high.

He did not give us a definitive answer on the second (eg,
1st is for
500k, 2nd - a heloc is for 100k), house sells for 500k.
We are in
California. Could the 2nd do a judicial whatever? Can
the second
still go after the homeowners after they have filed for BK
and have
foreclosed?
Is it only the house payments that are crushing your
friends? Or do they have a good deal of other debt?

If it is the house payments that are overwhelming them, here
is a Feb. 29, 2008 article that discusses how foreclosure
without bankruptcy in California is preferable for many
folks: http://www.nytimes.com/2008/02/29/us/29walks.html? .
Registration for the NY Times site is free. For over ten
years the Times site has not bothered me with junk email.

I would consider having your friends talk to the company in
the article, www.youwalkaway.com next. Notice the question
section, which asks about first and second mortgages.

Also, and as the article suggests, many banks will be happy
to talk about changing the terms of the mortgage(s) when the
bank stands to lose a good deal due to an upside down
situation such as you describe.

For the future, encourage your friends to become apartment
renters until they have 20% for a downpayment. Renting an
apartment makes financial sense for many people. Owning a
home is overrated when it comes to financial planning.

Consider posting your query to misc.invest.financial-plan ,
since the moderator here asks that questions be tax-related,
and it's a bit of a stretch to call this a tax question
right now.
 

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