Tax on mortgage deficieny and deficiency judgments-do they apply after CH7?

[Diesel73L]

Does anyone know if you can be hit with a deficiency judgment or federal taxes on the mortgage deficiency if you walk away from a mortgage discharged in CH7 if the foreclosure/sale is completed AFTER the discharge? I've heard yes and no. NJ is a recourse state and deficiency judgments rarely happen from what I've read, but you never know. Basically I'm trying to decide on whether or not I want to do the following:

-Stop paying the (underwater) mortgage along with other debt in February
-File for CH7 in July
-Let foreclosure run its course while living in the home and banking the money-it could be two or three years before we need to vacate because of court log jams

Once the sale is completed, if there's a deficiency between the sale price and the balance owed (which there most certainly will be), two things can happen. First, the IRS can come after the borrower for the "forgiven" debt-not sure if this applies to a non-reaffirmed mortgage post CH7? I'm aware that the Mortgage Debt Relief Act prohibits this for now, but it expires at the end of 2012 and I'm guessing that foreclosure will take much longer than that. Second, the bank has three months after the sale to file a suit to get a deficiency judgment from the borrower. Again, it's exceedingly rare in NJ and the statute of limitations is incredibly short (in other states its years), but still, the possibility exists. The question is, does CH7 negate either of these?

[ValleYum]

Re: Being sued for a deficiency judgment: How can you be sued for a debt you no longer owe?

Re: 'Forgiven' debt: Straight from IRS Publication 4681:

Bankruptcy

Debt canceled in a title 11 bankruptcy case is not included in your income. A title 11 bankruptcy case is a case under title 11 of the United States Code (including all chapters in title 11 such as chapters 7, 11, and 13), but only if the debtor is under the jurisdiction of the court and the cancellation of the debt is granted by the court or occurs as a result of a plan approved by the court.

How to report the bankruptcy exclusion. To show that your debt was canceled in a bankruptcy case and is excluded from income, attach Form 982 to your federal income tax return and check the box on line 1a. Lines 1b through 1f do not apply to a cancellation that occurs in a title 11 bankruptcy case. Enter the total amount of debt canceled in your title 11 bankruptcy case on line 2. You must also reduce your tax attributes in Part II of Form 982 as explained under Reduction of Tax Attributes, later.

http://www.irs.gov/publications/p4681/ch01.html

[HHM]

Where have you heard "yes."

If the mortgage debt was listed in your bankruptcy petition, if you did not reaffirm, if you received your discharge, and if you did not refinance the mortgage after the bankruptcy was discharged, then you are NOT liable for any deficiency or taxes on a home foreclosed AFTER the bankruptcy discharge.

Now, some states have judicial foreclosure, so as a matter or rote procedure, the state court may grant the deficiency, but that doesn't mean you are liable to pay it (because it was discharged in BK).

The stickier issue is on the tax consequences...for a foreclosure that occurred AFTER the bk was filed or discharged, non-issue. Where you can have a problem is if the BK is filed well after the foreclosure. So, if the home was foreclosed in 2010, and the debtor filed BK in 2011, the debtor may still be liable for the tax debt notwithstanding the BK assuming the bank forgave the debt in 2010 and no other exception applies (insolvency, primary residence, etc.).

[ValleYum]

Where have you heard "yes."

If the mortgage debt was listed in your bankruptcy petition, if you did not reaffirm, if you received your discharge, and if you did not refinance the mortgage after the bankruptcy was discharged, then you are NOT liable for any deficiency or taxes on a home foreclosed AFTER the bankruptcy discharge.

Now, some states have judicial foreclosure, so as a matter or rote procedure, the state court may grant the deficiency, but that doesn't mean you are liable to pay it (because it was discharged in BK).

The stickier issue is on the tax consequences...for a foreclosure that occurred AFTER the bk was filed or discharged, non-issue. Where you can have a problem is if the BK is filed well after the foreclosure. So, if the home was foreclosed in 2010, and the debtor filed BK in 2011, the debtor may still be liable for the tax debt notwithstanding the BK assuming the bank forgave the debt in 2010 and no other exception applies (insolvency, primary residence, etc.).

But in the scenario the OP gave - (1)default, (2)BK, (3)foreclosure - there would be no tax issues, correct? If there are, my accountant and I are gonna have words in a week or so when filing time comes around.

[HHM]

But in the scenario the OP gave - (1)default, (2)BK, (3)foreclosure - there would be no tax issues, correct? If there are, my accountant and I are gonna have words in a week or so when filing time comes around.

Correct, NO ISSUE if the BK pre-dates the foreclosure