Foreclosure and filing taxes

[sprite]

Hello,
I am going to foreclose on my home. We have tried to sell it with no luck, and cannot afford it with all our other debts. My question is how does the foreclosure effect your taxes the following year, and if the IRS comes after us for the money can we file Chapter 13. How much does Chapter 13 leave you to live on? Thanks for any help you can give.

[lrprn]

Welcome to BK Forum, sprite - glad you found us!

I am going to foreclose on my home. We have tried to sell it with no luck, and cannot afford it with all our other debts. My question is how does the foreclosure effect your taxes the following year, and if the IRS comes after us for the money can we file Chapter 13. How much does Chapter 13 leave you to live on?

It would help us help you better if you can share more information about your situation.

ABout surrendering your home and the potential tax hit - What state do you live in? How far behind are you on your mortgage payments? Has your mortgage lender already started the foreclosure process in court? How much equity do you have in your home compared to how much you owe on it?

And about the potential of filing Ch 13 - What is your current annual gross income? What's the size of your family? Have you spoken to any bankruptcy lawyers in your area yet about your situation?

Again, welcome! Keep asking questions and reading the forum stickies. We're here to help any way we can.

[sprite]

I guess I should have told more about my situation. I have talked to a bankruptcy lawyer, and he said my husband and I make too much money to file chapter 7. It is just my husband and I, no children, and we live in Michigan. My lawyer suggested foreclosure and then if they come after us then we should do the Chapter 13. My only concern is what happens with are taxes the following year. I make about 42000 a year, my husband makes 25000. Our house payments are 1000 and there is no equity in the house. Our biggest problem was that we had our house on the market and it did not sell for about 4 months. We took it off because we were trying to refinance with cash out. Well no one will finance us because are house was on the market, all the while drowning in debt. We really do not want to keep the house because it needs a lot of work which will cost more money that we do not have.We really want to move out of Michigan, and cannot take a loss on the house because we cannot make up the payment. I hope that helps! Thank you for any help you can give

[lrprn]

I make about 42000 a year, my husband makes 25000. Our house payments are 1000 and there is no equity in the house.

The lawyer you spoke with is right - the median income in Michigan for two people is $50,665 and together you two are well above that. It's very unlikely you could qualify for Ch 7 after the required Means Test is done.

How much unsecured debt do you currently owe? Are there other assets (land or property) or a business involved in your finances? Are you both co-signers on the house loan and co-owners on the house deed?

We really do not want to keep the house because it needs a lot of work which will cost more money that we do not have.We really want to move out of Michigan, and cannot take a loss on the house because we cannot make up the payment.

I understand where the lawyer was going - if your mortgage lender forecloses and takes you to court for a judgment, then you could file Ch 13 to stop and wipe out the judgment. However, often the whole reason for filing Ch 13 is to save assets which you've already surrendered - typically a house and your cars. But you are saying you don't want your house. How about your cars?

Most bankruptcy lawyers provide free consultations. Make appointments with 3-4 in your area and work through your situation with them. Don't make such an important decision after talking to just one. There's a wide variation in how the bankruptcy law is interpreted around the country and, frankly, the competency level of lawyers practicing in this area can vary widely as well. By talking to as many as possible before deciding how to proceed, you will learn a great deal plus get an idea of how filing may play out in your situation, including the potential taxes impact. Please come back and let us know what you find out, and hang in there!

[tofargone]

If you are looking at moving I would hold off on filling anything. If you Surrender the home and them move out of state your income may change. You may actually be in a better situation if you make less money in a different state. There are seasoning laws of how long you need to live in a certain state to file in that state ( not sure what they are ), but an example is if you are making the 67K you are now then move and say only you find a job at 42K you will probably qualify for a 7. Trust me, you do not want to do a 13 unless you have to. I am and am not looking forward to living the next 4.75 years of my life under a microscope.

Good luck.

[sprite]

Thanks you for all the help. Tofargone, I wanted to know how much of your money do they take or should I say how do they figure it out. Do they leave you with anything? I do want to keep my cars, but not the house. We do not plan on moving for about another year. Does anyone know the effect of foreclosure on your taxes? Do they use the whole amount your house sold as income? or do they just use the difference or the payments that you did not make? Thanks

[tofargone]

In a 13 they will take whatever is deemed your disposable income. Basically anything after paying you bills, food, clothing etc.... What that figure is and how much they will let you keep seems to vary region to region depending on how strictly the trustee interperetes the law. There are several tests to see what that figure could be, but the best advice is going to come from a lawyer. As for taxes usually you do not get taxed when you sell your home as long as you lived there for 2 years. If you surrender it you can expect the lenders cost to sell will not leave you anything to get back and most likely you will owe them. With that they will either go after a deficiancy judgement in which they will try to get the money from you, or they may not. When it comes to taxes the worst that may happen is they send you a 1099 for any deficiancy that you don't pay and it counts as income. There are some on this forum that I think have gone through this and hopefully will be able to get into more detail, what I know is from a friend that went through it so I may not have all the facts.

Good luck

[sprite]

Thank you so much. I am so glad I found this forum. Everyone is very supportive and it is nice to know that I am not the only one going through these type of problems.

[avega]

Have you considered a short sale?? Here is how to approach this option and avoid tax hits...

You may be able to sell your home in a short sale which means that if you find someone to buy your home for less than what you owe, the bank will consider the sale and reducing the balance to avoid the costs of forclosing on someone, preparing for the sale and then marketing.

Here is where the tax liability comes in.. just like if you settle on a credit card over $600, they can file a 1099 for a gift of income for the difference, which you would have to claim as income and pay taxes on... if you call your mortgage company (typically will let this happen once in default) they MAY be willing to not issue a 1099 on a short sale. If this is the case you can sell the house for less than what you owe, or contact those investors who specialize in this, but you cannot make anything on the sale(at least on paper)... the investor gets a house cheap, you avoid a forclosure, and the bank saves $. but Ive heard that alot of times they dont bother to go for deficieny balances because the costs vs. recovery percentages dont always make it worthwhile, but that is just something I have heard with no assumptions on being true..

and if your looking for something under $1000, dont move to Florida..good luck