Helocs, Short Sales and BK's?

[swmorgan7]

Short Sale question. I have a client in AZ with a HELOC 2nd with BofA....1st is paid in full and BofA is due to get 50K leaving a deficiency of 80K. The 80k deficiency will be charged off and reported as a collectible balance. Then the lien is released the property closes and the unsecured debt is handled by BofA's Loss Recovery department. My question is after the completion of the short sale can my client then file for BK and include the 80K deficiency?

[diviaruba]

Absolutely. It becomes an unsecured debt like any other.

[swmorgan7]

How long must my client wait before she files the BK?

[keepmine]

She can file at anytime. The foreclosure does not have to be complete.
Any deficiency is scheduled as an unliquidated liability.

The question I have is, if bk is the end game, why fool around with a short sale? File bk and let BOA deal with the aftermath.

[swmorgan7]

She can file at anytime. The foreclosure does not have to be complete.
Any deficiency is scheduled as an unliquidated liability.

The question I have is, if bk is the end game, why fool around with a short sale? File bk and let BOA deal with the aftermath.

We already have a buyer and the deal is set to close next week...If we can get BofA to reduce the collectible amount to 25K as an unsecured note at 0% intereste payable over a 15yr period, the BK maybe unnecessary. What do you think?

[keepmine]

We already have a buyer and the deal is set to close next week...If we can get BofA to reduce the collectible amount to 25K as an unsecured note at 0% intereste payable over a 15yr period, the BK maybe unnecessary. What do you think?

0% over 15 years- I think you're dreaming.
Have you considered the tax ramifications when a 1099C is issued?

[swmorgan7]

0% over 15 years- I think you're dreaming.
Have you considered the tax ramifications when a 1099C is issued?

What does it hurt to try? I have negotiated several high balances down to similar numbers. We prove an insolvency so I doubt the tax ramifications will be anything. Even a 4% note with a 25K balance over 10 yrs. is doable. If the BK can be avoided great if not what did it matter?

[swmorgan7]

We have the short sale approval..If she doesn't sign the letter we run the risk of being sued by the buyers for specific performance. This sale will close next week, but her attorney is saying not to sign the paperwork and let it go to foreclosure. Why would the attorney say that when the bank has approved the short sale? She would still have to file a BK and have a foreclosure on her record as the deficiency would still be a collectible balance as it is a HELOC. She is not protected under our anti-defeciency statutes. The end goal would be to get the house closed and take our chances that we could work with BofA to lower the collectible balance and workout a payment plan that makes sense and is affordable. If we cannot do that then we can still file the BK and the deficiency would be discharged. Am I right?

[HHM]

Well, obviously your an agent trying to get a commission, so swmorgan7 isn't exactly going to act in the client's best interests. But even paying $25K, let alone $80K, over 15 years to avoid a BK is just stupid.

But to answer the questions; yes, the deficiency is dischargeable in BK and the seller can file the BK at any time to deal with the deficiency. If BofA keeps the deficiency in "collectible" status, there are no tax ramifications; you only get income tax ramifications if BofA forgives the debt. And as stated in numerous posts in this forum, so long as you can prove insolvency (see IRS form 982), you can except the forgiven debt from income.

In the BIG picture, there is practically no benefit to the seller for doing a short sale. The only people who benefit from a short sale are the buyer (who does not have to compete with other buyers at a foreclosure auction), the real estate agent who gets the commission, the buyers mortgage broker, and the sellers bank (sometimes) for liquidating a note that would have probably ended in foreclosure.

(1) Many people are under the false assumption that short sales are not reported to CRA's, that is not true. Unless you specifically negotiate with the lender to not report the short sale, the short sale is an adverse entry on the owners credit report; thus, from a credit reporting standpoint, there is little difference between doing a short sale vs. foreclosure.
(2) As has been pointed out, the deficiency balance must be dealt with in some manner. If your lucky, the bank will simply forgive the debt, and the seller will qualify for insolvency. Granted, the same is true for foreclosure, but usually in the foreclosure context, the banks are more apt to writing off the deficiency. And if you file BK, the deficiency is discharged.
(3) The main question that needs to be ask, will getting rid of the house solve the underlying financial problem facing the seller. Many times the answer is no as they will have other debt and income issues, so simply doing the short sale and putting the seller in MORE debt is not the answer.
(4) Short sales take time. Since most people procrastinate when it comes to financial things (i.e. head in sand type thing), once they come to the realization that the house must go, their financial situation is probably too far gone for a short sale to be of any meaningful use.

Thus, I really have a hard time ever recommending a short sale because there is generally no benefit to the seller. I can really only envision a couple circumstances where short sale may be in the best interests of a seller, i.e. no other unsecured debt, stellar credit, the seller is able to negotiate the right kind of short sale (i.e. no adverse credit reporting, debt is forgiven, and seller qualifies as insolvent), then a short sale would work. But outside those conditions, there is no reason a seller should do a short sale.

Generally, real estate agents, mortgage brokers, and investors who promote short sales are about as scummy as pay day loans.

Sounds like the attorney has his head on his shoulders, the specific performance suit is an empty threat, and BK would take care of it if the buyers were stupid enough to actually sue. If the best argument you have is, lets take our chances, that is weak. BK brings certainty to all aspects of the situation. Sounds like you did a piss poor job putting this short sale together if you don't already have an agreement to deal with the deficiency and are needlessly trying to scare the seller with untrue doomsday credit reporting scenarios.

[BK2008]

Well, obviously your an agent trying to get a commission, so swmorgan7 isn't exactly going to act in the client's best interests. But even paying $25K, let alone $80K, over 15 years to avoid a BK is just stupid.

But to answer the questions; yes, the deficiency is dischargeable in BK. If BofA keeps the deficiency in "collectible" status, there are no tax ramifications; you only get income tax ramifications if BofA forgives the debt. And as stated in numerous posts in this forum, so long as you can prove insolvency (see IRS form 982), you can except the forgiven debt from income.

In the BIG picture, there is practically no benefit to the seller for doing a short sale. The only people who benefit from a short sale are the buyer (who does not have to compete with other buyers at a foreclosure auction), the real estate agent who gets the commission, the buyers mortgage broker, and the sellers bank (sometimes) for liquidating a note that would have probably ended in foreclosure.

(1) Many people are under the false assumption that short sales are not reported to CRA's, that is not true. Unless you specifically negotiate with the lender to not report the short sale, the short sale is an adverse entry on the owners credit report; thus, from a credit reporting standpoint, there is little difference between doing a short sale vs. foreclosure.
(2) As has been pointed out, the deficiency balance must be dealt with in some manner. If your lucky, the bank will simply forgive the debt, and the seller will qualify for insolvency. Granted, the same is true for foreclosure, but usually in the foreclosure context, the banks are more apt to writing off the deficiency.
(3) The main question that needs to be ask, will getting rid of the house solve the underlying financial problem facing the seller. Many times the answer is no as they will have other debt and income issues.

Thus, I really have a hard time ever recommending a short sale because there is generally no benefit to the seller. I can really only envision a couple circumstances where short sale may be in the best interests of a seller, i.e. no other unsecured debt, stellar credit, the seller is able to negotiate the right kind of short sale (i.e. no adverse credit reporting, debt is forgiven, and seller qualifies as insolvent), then a short sale would work. But outside those conditions, there is no reason a seller should do a short sale.

Generally, real estate agents, mortgage brokers, and investors who promote short sales are about as scummy as pay day loans.

Sounds like the attorney has his head on his shoulders, the specific performance suit is an empty threat, and BK would take care of it if the buyers were stupid enough to actually sue. If the best argument you have is, lets take our chances, that is weak. BK brings certainty to all aspects of the situation. Sounds like you did a piss poor job putting this short sale together if you don't already have an agreement to deal with the deficiency and are needlessly trying to scare the seller with untrue doomsday credit reporting scenarios.

Beautiful! You need to sticky your reply.

I have an agent that keeps calling & calling...short sale the only way to go..blah blah blah....

Ummm, no. I prefer to surrender in BK, rather than have a SS/Foreclusre on the books. My situation is unstable as it is, and to drag a short sale out for who-knows-how long...I don't think I have the stomach to do it.
BK sticks a fork in the whole issue for me.

[HHM]

There is already a sticky that discsses short sales in the foreclosure section.

http://www.bkforum.com/showthread.php?t=17098

So I copied my reply to that thread

[swmorgan7]

Well, obviously your an agent trying to get a commission, so swmorgan7 isn't exactly going to act in the client's best interests. But even paying $25K, let alone $80K, over 15 years to avoid a BK is just stupid.

But to answer the questions; yes, the deficiency is dischargeable in BK and the seller can file the BK at any time to deal with the deficiency. If BofA keeps the deficiency in "collectible" status, there are no tax ramifications; you only get income tax ramifications if BofA forgives the debt. And as stated in numerous posts in this forum, so long as you can prove insolvency (see IRS form 982), you can except the forgiven debt from income.

In the BIG picture, there is practically no benefit to the seller for doing a short sale. The only people who benefit from a short sale are the buyer (who does not have to compete with other buyers at a foreclosure auction), the real estate agent who gets the commission, the buyers mortgage broker, and the sellers bank (sometimes) for liquidating a note that would have probably ended in foreclosure.

(1) Many people are under the false assumption that short sales are not reported to CRA's, that is not true. Unless you specifically negotiate with the lender to not report the short sale, the short sale is an adverse entry on the owners credit report; thus, from a credit reporting standpoint, there is little difference between doing a short sale vs. foreclosure.
(2) As has been pointed out, the deficiency balance must be dealt with in some manner. If your lucky, the bank will simply forgive the debt, and the seller will qualify for insolvency. Granted, the same is true for foreclosure, but usually in the foreclosure context, the banks are more apt to writing off the deficiency. And if you file BK, the deficiency is discharged.
(3) The main question that needs to be ask, will getting rid of the house solve the underlying financial problem facing the seller. Many times the answer is no as they will have other debt and income issues, so simply doing the short sale and putting the seller in MORE debt is not the answer.
(4) Short sales take time. Since most people procrastinate when it comes to financial things (i.e. head in sand type thing), once they come to the realization that the house must go, their financial situation is probably too far gone for a short sale to be of any meaningful use.

Thus, I really have a hard time ever recommending a short sale because there is generally no benefit to the seller. I can really only envision a couple circumstances where short sale may be in the best interests of a seller, i.e. no other unsecured debt, stellar credit, the seller is able to negotiate the right kind of short sale (i.e. no adverse credit reporting, debt is forgiven, and seller qualifies as insolvent), then a short sale would work. But outside those conditions, there is no reason a seller should do a short sale.

Generally, real estate agents, mortgage brokers, and investors who promote short sales are about as scummy as pay day loans.

Sounds like the attorney has his head on his shoulders, the specific performance suit is an empty threat, and BK would take care of it if the buyers were stupid enough to actually sue. If the best argument you have is, lets take our chances, that is weak. BK brings certainty to all aspects of the situation. Sounds like you did a piss poor job putting this short sale together if you don't already have an agreement to deal with the deficiency and are needlessly trying to scare the seller with untrue doomsday credit reporting scenarios.

Tell me how you really feel...Yes I am an agent and have successfully negotiated over 100 short sales with usually no remaining deficiency. The Mortgage Cancellation Relief Act allows the borrower who lost their home to a foreclosure or short sale to face no tax consequence as long as the home is their primary residence. Unless they have a HELOC and did not used the money solely on the home. So usually most clients prove an insolvency or fall under this Act.

This short sale is complete and will close this week. My client will not have a foreclosure on their credit. And contrary to what you think a foreclosure is much worse. I did 7 short sales for one client almost 2 yrs ago. His BK attorney said just file the BK. Well he held off and we sold all 7 he proved insolvent and did not have to file a BK. Saving him a foreclosre and BK. He will be buying a house in California this month. I take my job serious and have my clients best interest in mind. This deal only makes me about 4K and I have worked on it for months. She only has 3 missed payments and will have no foreclosure, tax ramifications and may not have to file a BK.

You need to check yourself...I have done a tremendous job on this deal. She was a former licensed agent who lied on her 1003 to get the HELOC in the first place. She spent every penny of the 130K BofA gave her on bills and fun. Who is the slimeball here? Not me. I have saved her ass potentially. BofA does not forgive deficiencies on 2nd HELOCS. I did a great job of negotiating the contract to the highest price. Nothing more I could do about BofA's policy. They get 50K of 130K owed. Everyone wins here not just me. You are very arrogant and wrong about this one.

[swmorgan7]

Beautiful! You need to sticky your reply.

I have an agent that keeps calling & calling...short sale the only way to go..blah blah blah....

Ummm, no. I prefer to surrender in BK, rather than have a SS/Foreclusre on the books. My situation is unstable as it is, and to drag a short sale out for who-knows-how long...I don't think I have the stomach to do it.
BK sticks a fork in the whole issue for me.

You will have both a foreclosure and BK...Short Sale's are not for everybody. I close 4-5 short sales a month and for most people they are the way to go. Most people got themselves into these situations on their own and prefer to just "Walk Away". Not all your problems go away that way. You still face the ramifications. If you had a way to not have a foreclosure or BK would you take it? I turn down more short sales than I take. If you have debt besides mortgage that you cannot pay then a BK is probably the best thing. Surrender or don't surrender the home. But to think a short sale is as bad as a foreclosure is just wrong. It's not even close if you haven't missed many payments. Sounds like you have been getting bad advice.

[HHM]

Guess what, that guy in CA, had he declared BK 2 years, he would still be able to buy that house in CA.

As I figured, you fear monger the credit report because you don't really understand how BK, foreclosure, AND short sales effect credit reports. If you read our rebuilding credit section of this forum, you will see just how quickly credit reports recover after BK (and foreclosure). A

In any event, you are correct, SS are not for everyone. I think my standards for doing SS are a little more stringent. The only argument you have is that the seller won't get a foreclosure on their credit report, big deal. You are just preying on the over-inflated importance people put on credit reports and the misconceptions out there about how long negative entries "really" effect a persons ability to borrow.

You are correct, that for the scoring models, the missed payment + foreclosure are a bigger negative (but not Far worse) than a short sale, but a short sale is still an adverse entry and when lenders do a subjective review, there is little difference between SS and foreclosure, the debtor still created a loss for the bank and is a high risk borrower. When it comes to BK and Foreclosure, if the 2 events are linked, they are viewed as a single negative.

And you are correct, the Mortgage Relief act makes dealing with the deficiency easier.

And I agree, BK should not be taken lightly, and if the ONLY financial issue a person is facing is a house they can no longer afford, they should look at other options beside BK. But if BK is going to be inevitable, there really is no point in doing a short sale. From a financial perspective, if BK inevitiable and you are going to surrender the house, the debtor should simply stop paying their mortgage, live rent free in their house for the length of the BK and and foreclosure process and allow the BK to resolve the all the debt. I have seen people who haven't made a mortgage or rent payment in over year and are still living in their homes.

[BK2008]

I never said ss/forcloseure were bad...in the right circumstances, they could be a good thing.

But 30K worth of debt, an pending job loss, a home that is upside down by $20K, and two lenders on it.....SS or DIL's ain't gonna happen.

And I don't have a BK, both of my mortgages are reporting 0IIB. Even my repo'd car is reporting 0IIB.