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"Walking away" from mortgages (post bankruptcy) but home is now a Rental Property

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  • "Walking away" from mortgages (post bankruptcy) but home is now a Rental Property

    Kind of a 3 topic multi-part question, but nothing is ever simple, is it?

    My former primary residence (1st & 2nd mortgage by same lender) was included in my Ch 7 bankruptcy and because of this, my lawyer told me my lender cannot come after me for any debt owed and I can "walk away" clean.
    However, in order to attempt to save our home even after bankruptcy, we had to start renting it out and we moved out of state to pursue a better job and cheaper cost of living. So our property included in the bk is now legally an "income property" which I'm afraid complicates walking away with no financial recourse... at least as far as taxes are concerned.
    We hoped to wait it out for the market to recover, but 10 months later and we are starting to get behind and can't afford 2 mortgages and our rent for where we currently live. Our renters pay us $500 less than what we owe towards the home each month. At this point we decided we need to utilize our choice to "walk away" from the house and mortgages.

    1)
    But what are we liable for taxable income/profit in this situation because it is legally considered an "income property" now? (p.s. we do not own any other property or any significant assets to speak of)

    Our stats: Bought home in 2002 for $105,000. A refi and 2nd mortgage later we now owe $160,000. We put the majority of the money earned from the refi & 2nd mortgage back into the house as renovations (I still have the receipts!). At this point based on comps, our house is worth for around $150,000.

    2)
    Our lawyer also said when we "walk away" that "foreclosure" should not appear on our credit report as the mortgages were already discharged via the bankruptcy, but he said that was beyond his scope and couldn't guarantee it.
    Can anyone report if this is true or not?
    That would be great if it was only bankruptcy on our credit report and not both bk and foreclosure.

    3)
    1 more thing: when you do "walk away" - how exactly do you do that? Call the lender and ask to talk to the bankruptcy department and then inform them you've included your mortgage in Ch 7 and you are using your right to walk away and please don't bother pursuing me for the debt? Or am I going to get the threatening letters anyway and ignore them? How long after you stop paying until you come back to your home to discover all the locks are changed by the bank if the home was vacant? I'm just wondering when I can stop paying but guarantee that the moment my tenants leave by Oct 1st we can show up to take out remaining possessions. I don't want to run the risk of being locked out and losing the worth of what personal items are left inside (hey, I'm including the fridge, stove and washing machine we paid for along with a few other things - we're taking all we can!). Thoughts?

    Thanks!

  • #2
    If your renters are paying $500/mo less than the mortgages combined - you have no rental profit to speak of.

    It would probably be wise to consult an attorney as to any legal ramifications your renters might have (since you have a contract with them) but ultimately you'll probably serve notice to your renters in some manner to let them know you are not keeping the property. And at whatever point you stop making mortgage payments, perhaps should stop taking rental payments as well. Just my 2 cents on that topic. The house would eventually go into foreclosure. Depending on your state's processes, they could get to stay there for a while...

    Stop making mortgage payments, eventually the lender will pursue the foreclosure process as required in your state. Foreclosure is the act of the bank taking the property back, not a financial matter for you. You should receive notices - not collection efforts.
    Get mortgage modified: DONE! 7 months of back interest payments amortized, payment reduced over $200/mo
    (In the 'planning' stage, to file ch. 13 if/when we have to.)

    Comment


    • #3
      Sorry - forgot to included the "taxable income" math I found.
      "Lenders sometimes cancel or forgive a person's debt. While this relieves the debtor of an immediate financial stress, it often triggers a tax liability. Under the tax law, canceled debt is considered income to the debtor and is included as part of the debtor's income." (via taxes.about.com)
      *Excluding* money earned from the tenants (which is pretty much negative, yes) for foreclosure on income property you take the amount still owed on the loans ($160000) and subtract Fair Market Value ($150000) and the difference is considered "taxable income". I just wonder if this math happens at all if the loan was considered discharged...

      Also, my renters will have no legal recourse as their lease is up at the end of Sept and I have the right not to let them renew and I will give them fair warning that they cannot stay. It is not their business why I don't want them to renew the lease and frankly they were late more than once and bounced more than 1 check, so I plenty of reasons besides that we're letting the house go.

      "You should receive notices - not collection efforts."
      I don't get the difference... a notice *is* a collection effort. We've been 30-60 days behind already and we get the collection effort notices to "pay in full within 30 days". So there is no way to avoid these letters? Why should my lender waste time, money and trees by sending me notices if I'm up front with them about including the debt in Ch 7... they don't even have to spend money trying to evict me or any tenants as the house will be vacant. Is it really going to take legal action by them and a "defense" via my lawyer and Ch 7 laws to stop the lender from coming after me? Seems like such an unnecessary and more expensive hassle.

      Comment


      • #4
        Basically you would be using Form 982 to exclude it from your income for tax purposes as debt discharged in a Title 11 case. Don't confuse Title 11 with Chapter 11 - Chapter 11 is but one part of the bankruptcy code, while Title 11 is the entire bankruptcy code.
        C7 Filed: 2009-11-06 | 341: 2009-12-14: | DISCHARGED: 2010-02-09
        Condo: Walked away due to 2nd mortgage intransigence; 1st foreclosed. Now totally DEBT FREE!!

        Comment


        • #5
          So does a foreclosure show up on your credit report on a mortgage that was included in Chapter 7? Did you ever find out? Or anyone else? Thank you.

          Comment


          • #6
            Originally posted by rw8484 View Post
            So does a foreclosure show up on your credit report on a mortgage that was included in Chapter 7? Did you ever find out? Or anyone else? Thank you.
            I actually did not "walk away" from my property in CT that was included in my Ch. 7 bankruptcy after all, so I can't tell you if "foreclosure" would appear on your credit report. I would think that it would have NO BUSINESS appearing there seeming your Ch 7 is already listed on your credit report and your mortgage was discharged via that, so how can they report a foreclosure on a discharged item? Seems redundant.

            I can say that my mortgage (for which I'm still paying on) does NOT show up on my credit report. So on one hand I get no credit for still making my payments, but on the plus side, when I get behind every once in a while and go 60 days late, it is also not reported either.

            Comment


            • #7
              Originally posted by Gwentopia View Post
              1)
              But what are we liable for taxable income/profit in this situation because it is legally considered an "income property" now? (p.s. we do not own any other property or any significant assets to speak of)

              Our stats: Bought home in 2002 for $105,000. A refi and 2nd mortgage later we now owe $160,000. We put the majority of the money earned from the refi & 2nd mortgage back into the house as renovations (I still have the receipts!). At this point based on comps, our house is worth for around $150,000.
              For rental properties you have to consider capital gain/loss, depreciation recapture, profit/loss and debt forgiveness. Based on your numbers you have $10k debt forgiveness and about $45K capital gain. Since you only have rented 10months, depreciation should be OK. Be sure to add in all your cost of renting into the P&L including insurance, maintenance, water etc.
              Lawyer - $3000
              Filing fee - $299
              Fresh Start - Priceless

              Comment


              • #8
                Originally posted by jst4f View Post
                For rental properties you have to consider capital gain/loss, depreciation recapture, profit/loss and debt forgiveness. Based on your numbers you have $10k debt forgiveness and about $45K capital gain. Since you only have rented 10months, depreciation should be OK. Be sure to add in all your cost of renting into the P&L including insurance, maintenance, water etc.
                Thinking more about this you may not have to do all that I said earlier. You have lived in the house in the last five years so it could still be considered your primary residence and qualify for protection from debt forgiveness. You will need to check state laws. It is also something to negoiate with the lender. I remember a friend bought a second larger home and kept the first one to rent out. He did that for about a year but he could get enough rent to pay for the mortgage and the maintenance so he walked away. Here in CA, they qualified for debt forgiveness protection on his primary residence and had no tax consequence other than reporting the rent income, which was offset by the expences. Since you only rented for 10months or so, it may work for you. Note they did a short sale and not a foreclosure and that may make a difference. Try a shortsale with a short sale real estate expert and they should help you navigate this issue to your best advantage. I always think of a short sale as the active approach and foreclosure as being passive. Since you are not living in it, short sale is an option for you. Please keep us posted on your progress
                Lawyer - $3000
                Filing fee - $299
                Fresh Start - Priceless

                Comment


                • #9
                  Capital gains won't apply so long as OP has lived in the house for any 2 of the 5 years prior to disposition. (Capital gains exclusion 250K if single, 500K if married)

                  Cancellation of debt income won't apply because the debt was discharged in bankruptcy. She just files the 982 as iv65586 mentioned above.
                  Last edited by debee; 11-14-2011, 01:03 AM. Reason: to add exclusion amounts
                  There are two secrets for success in life:
                  1.) Never tell everything you know.

                  Comment


                  • #10
                    In case you missed it (which some of you did), the new question on deck (via rw8484) is whether “foreclosure” will appear on your credit report even if the mortgage was previously discharged via Ch 7 BK.

                    As for me, the originator of this thread, I never did “walk away” from my former home/rental property.
                    We actually found really good tenants, GMAC lowered my 2nd mortgage from 14% down to 5% (SWEET!) and I got a loan modification for the 1st mortgage, so we’ve continued to make payments, though we are at the mercy of decent tenants.

                    I guess now that I should be concerned that the longer I keep up the payments via renting it out, the longer it’ll be since it was my primary residence.
                    At this point, it’s been a little over 2 years since we’ve no longer lived in the house.

                    Comment


                    • #11
                      Originally posted by Gwentopia View Post
                      In case you missed it (which some of you did), the new question on deck (via rw8484) is whether “foreclosure” will appear on your credit report even if the mortgage was previously discharged via Ch 7 BK.
                      I have read on here that most people in this situation are finding (and I believe the general consensus) is that:

                      A foreclosure notation does not appear on the public record portion of your credit report if your mortgage was previously discharged via Chapter 7 BK.

                      Of course, the regular BK Forum caveats apply: your mileage may vary and check with your attorney!
                      ~~ Filed Over Median Income Chapter 7: 12/17/2010 ~~ 341 Held: 1/12/2011 ~~ Discharged: 03/16/2011 ~~
                      Not an attorney - just an opinionated woman.

                      Comment


                      • #12
                        Originally posted by debee View Post
                        Capital gains won't apply so long as OP has lived in the house for any 2 of the 5 years prior to disposition. (Capital gains exclusion 250K if single, 500K if married)

                        Cancellation of debt income won't apply because the debt was discharged in bankruptcy. She just files the 982 as iv65586 mentioned above.
                        This is correct.

                        Also, the foreclosure won't be on your credit report, but that doesn't mean it is not there to be found. For future mortgages, the foreclosure is discovered as part of the underwriting process.

                        I doubt you have anything you need to worry about tax wise. Yes, you will need to claim the rental monies received as income (and off set with the expense). You probably won't have issues with cap gains, even if the house is turned into a rental so long as you don't depreciate. Depreciation is elective, you can take it, but you don't have too.

                        Comment


                        • #13
                          I agree with not having to take depreciation on a rental - BUT when you sell it you must account for the depreciation
                          as if you took it as a deduction thereby decreasing your basis. The term is depreciation that is allowed or ALLOWABLE. If You
                          should sell it and you can still claim the exemption for the personal residence ( lived in 2 out of the five years) then you must
                          recapture the depreciation as income.

                          Comment


                          • #14
                            Originally posted by PANSYFACE View Post
                            I agree with not having to take depreciation on a rental - BUT when you sell it you must account for the depreciation
                            as if you took it as a deduction thereby decreasing your basis. The term is depreciation that is allowed or ALLOWABLE. If You
                            should sell it and you can still claim the exemption for the personal residence ( lived in 2 out of the five years) then you must
                            recapture the depreciation as income.
                            True enough

                            Bottom line, get out of the house however you can, short sell, foreclosure, etc

                            Comment

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