Bankruptcy b/c of Potential Deficiency Judgment?

[RBisDebtFree]

My parents-in-law have a house that's worth $300k in the current market but the liens on it total up to $1.08m. Here's how it happened:
1st lien is the primary mortgage with CountryWide (now BoA Home Loans)
2nd lien is the guarantee / guarantors' lien for another loan with Prime Pacific
3rd lien is the BECU (Boeing Employee Credit Union) home equity line of credit that was used to fund the loan with Prime Pacific

A loan (2nd lien) with Prime Pacific was a real estate investment that fell through and it's now approximatel $400k upside down. Prime Pacific is now foreclosing on both the investment property and their home.

They make well under median income for their family. I was told that BECU is very bad and furious and sues every single debtor that doesn't pay as agreed (if you have any info / experience with this particular credit union, I would greatly appreciate if you share!). But I am still questionable as to whether they need to file for bankruptcy protection or not? The whole is foreclosed on in October and BECU will probably only attempt to do anything after that (that's if they will). And if they will, would they be able to tell them to simply stay away because if they proceed than my parents-in-law will file for bankruptcy protection? I mean they qualify easily with or without those loan payments.

I would appreciate your input on this as I would like them to avoid a bankruptcy as much as possible. They have all their credit card at $0 balance and perfect credit history other than the real estate loans.

Thanks in advance!

[destitute]

I'm afraid that bk is likely the best option. If they don't bk and the banks foreclose your parents-in-law would still likely be liable for deficiency judgments. By filing bk their liability for the loans is removed otherwise the debt never really goes away.

[RBisDebtFree]

But isn't it possible that they will just write off the deficiency and send 1099 Cancellation of Debt Income to my parents?

I know guy that was in a similar situation and the bank charged off their HELOC deficiency. I guess what I am trying to see is whether it's worth for them to take their chances trying to avoid bankruptcy and hope that the banks do not proceed with a deficiency judgment?

[killinstinct]

Are you in WA? Sounds like it (BECU). If so, deficency judgments are rare. Primary loans generally can't pursue, second and third loans can, but my understanding is it still rarely happens. They know you can just file BK if you have to. Do they have other assets?

Regardless, I would get my financial records in order, meet with several attorneys and be ready to file if it comes. They will have plenty of warning with a lawsuit.

[RBisDebtFree]

Yes, I'm in Washington. I've also heard that deficiency judgments are rare here, I was told that Florida has it over the top but not our state. They have no other assets except household stuff and old car which seem to be exempt.

An attorney already has their full documentation and all they'll need to do is provide updated bank statements and pay stubs, other than that, their case is ready to be filed.

[killinstinct]

I think they're in the driver's seat then. I would hold out, see what happens, then file if they get slapped with a lawsuit, since they have no other debt.

[RBisDebtFree]

I see, I'll suggest that they think about this option then. Thanks for info!

[RBisDebtFree]

Talk to parents and their attorney (I'm kind of helping them with this whole process) and the decision is to wait, just get the case ready and wait.

I have a few questions though:
1) With mortgage and HELOC payments, my parents qualify b/c of making lower than the median and expenses being higher than income. Now, once the properties are sold off in a foreclosure auction and then don't have those payments anymore but a lower rent payment with which they might practically have disposable income but they would still not have any DI left if they use allowances. Would they qualify for CH7 after foreclosure with possbily having DI in reality but not according to the IRS allowances? I understand they wouldn't have to take a means test though.
2) Because they are going to wait, till when would they need to wait? Is it the end of the year when they would get their 1099 Cancellation of Debt Income forms from the lenders we want to make sure won't go sueing them?
3) I know that there's some 4 year Statue of Limitations (pardon me if I make mistakes in terminology), so if they send the 1099, do they still have 4 years to go after my parents?
4) If they don't send the 1099s at the end of the year for the losses / write-offs, is there any way to know what they possibly will / can do?

Thanks again!

[killinstinct]

Talk to parents and their attorney (I'm kind of helping them with this whole process) and the decision is to wait, just get the case ready and wait.

I have a few questions though:
1) With mortgage and HELOC payments, my parents qualify b/c of making lower than the median and expenses being higher than income. Now, once the properties are sold off in a foreclosure auction and then don't have those payments anymore but a lower rent payment with which they might practically have disposable income but they would still not have any DI left if they use allowances. Would they qualify for CH7 after foreclosure with possbily having DI in reality but not according to the IRS allowances? I understand they wouldn't have to take a means test though.
2) Because they are going to wait, till when would they need to wait? Is it the end of the year when they would get their 1099 Cancellation of Debt Income forms from the lenders we want to make sure won't go sueing them?
3) I know that there's some 4 year Statue of Limitations (pardon me if I make mistakes in terminology), so if they send the 1099, do they still have 4 years to go after my parents?
4) If they don't send the 1099s at the end of the year for the losses / write-offs, is there any way to know what they possibly will / can do?

Thanks again!

1) Typically if you're under median, they're not going to screw with you. The only possible scenario I could imagine is if someone was living with family, etc. (didn't have a rent payment), walked to work (no transportation costs), etc. A good attorney will finesse the numbers to insure that you get credit for your expenses. The median rule is there for a reason. If you're living anywhere near a reasonably 'normal' life you will incur these expenses, you probably just don't realize it.

2) I would wait until I got sued. Typically deficency judgments are part of the foreclosure process, and if your parents follow the process and are served the paperwork (one argument against avoiding service) there should be no surprises. There should be plenty of time to respond if a deficency judgement is being sought to file your BK petition. I understand it's not comfortable to 'wait' and 'not know what is going to happen', but it's in their best interest, if they want to try to get out of this with just a foreclosure and not BK.

Check out this site, it's great with foreclosure info:

http://www.foreclosurefish.com/wa.htm

Check out the "blog" section of the site as well, and search for relevant topics. Good info. I was considering just letting foreclosure go on my house and devoured the info on this site, but of course I ended up filing anyway. However, I hat a lot of other debt in addition, unlike your parents.

3) My understanding is that they can sue you or issue a 1099. Not both.

4) Again, I would encourage your parents to follow the foreclosure process on their home and perhaps even contact the banks and let them know their intentions. If the banks realize they just end up filing BK if a judgement is pursued, that would likely discourage them as well.

[RBisDebtFree]

What do you mean by "follow the foreclosure process"?

[killinstinct]

They should be getting served papers regarding the foreclosure? Are they out of the house or otherwise UTL by the mortage company? If so, that's a bit trickier. But regardless, it's all public record and they should be able to follow their case in the local court system. It's not like it's secret or something...

[RBisDebtFree]

I am not sure what the UTL is, sorry. They got Notice of Default, Notice of Trustee's Sale and Notice of Foreclosure. The sale date is Oct 23rd, so if the lender would want to start a case against them to obtain a deficiency judgment, that would be part of the foreclosure process?

Thanks again for your time!

[killinstinct]

Sorry...meant 'unable to locate'. (i.e. moved out, no forwarding address, have no clue what is going on because lender can't find me) Sounds like no...they're getting all of the notices. Yes, deficency judgement would be a part of the foreclosure process. If they were to pursue deficency it should be in the paperwork.

That being said, once the foreclosure sale happens and it is not enough to cover the balance of the remaining loans, they become 'unsecured'....i.e. like credit cards. They then have to pursue a traditional lawsuit against you, and that will likely take some time and they should be well appraised as well.

Time is on their side. Even if you lose a lawsuit and a 'judgement' is entered against you (including foreclosure), you will likely have plenty of time to file....I would wait until this happens, IF this happens. Check out the blog on foreclosurefish for some reassuring information.

[NeedNewStart]

I'm also thinking I might have to file due a potential deficiency judgment. Just have something for you to think about and I may be wrong but..... here it is.

If the first forecloses and the second and third become "unsecured" they can wait several years before they try to pursue the deficiency. In NV it's 6 years. So I guess you have to check the statue of limitations and decide if you can wait it out.

I don't know if a 1099 means it's a done deal. I would like to know.

[RBisDebtFree]

That was actually my next question: when they write it off, is it legally done over with? When is foreclosure case so-called "closed"? I would assume that if you write it off on 1099 and claim losses with IRS you cannot later go on and seek to recover the loss, again, they could treat it as income then I guess. But I don't know, I'd like to see what more experienced users have to say...