Question Bankruptcy vs. forecloser ? ?

[juggy]

Hi,
I'm new here so please don't beat me up if this is in the wrong forum.
I am upside down with my house, it's valued at approx 365,000 and I owe about 390,000
I bought it with my g/f at the time, and it looks like one of us is going to be leaving soon. our 1st and 2nd mort payments are about 3,300 a month. neither one of us can pay it with out the other. I have already went thru a bankruptcy in 1999 and pretty much fully recovered, i don't have any real credit card issues, ( maybe 3,000-4,000to pay it all off)
I get the feeling she might move out, so if I wait to get foreclosed on it could take 2-3 yrs. i was also thinking of paying the 1st and not the 2nd. but now i have read there are IRS implications with foreclosers and or not paying on a mortgage, and it would show up as income now that i don't have the mortgage any longer, or would a bankruptcy protect me from all of it, and i just take the credit hit for a period of time.

just wondering the pros and cons and what a good course of action might be ? ? ?

[LadyInTheRed]

Welcome to BKforum. Don't worry, we don't beat people up here.

If you file BK before foreclosure and the mortgages are discharged, the discharged debt will not be taxable income.

If you don't file BK and you can prove you are insolvent at the time the debt is written off, you also won't have to pay tax on the "forgiven" amount.

If foreclosure takes place in 2012, the loan was entirely for the purchase of a principal residence, and the deficiency is written off, you won't have to pay tax. Unfortunately, the chance of the foreclosure happening that quickly is small.

Here's the IRS website on mortgage forgiveness: http://www.irs.gov/individuals/artic...179414,00.html. The page also has a link to Publication 4681 that will explain the insolvency and bankruptcy exclusions from income on any type of forgiven debt.

If you don't file BK, the lender may get a deficiency judgment against you and try to collect or sell the debt instead of writing it off. If you think you can prove insolvency and avoid income tax on a forgiven debt, one strategy would be to stop paying the mortgage, live in the home for free for as long as you can and hope the bank doesn't try to get a deficiency judgment. You can always file BK when they file a complaint for the deficiency. If they instead send you a 1099 for the deficiency amount, you may have saved enough money living rent fee to cover any income tax hit.

Filing BK now gives you certainty and allows you to move on without worrying about what is going to happen and whether you are just delaying the inevitable. You can still live rent free until the bank gets around to foreclosing.

If you were happy with the attorney you used in your BK, I suggest you consult with him/her about your current situation. Also, do some reading around here to learn about how BK works these days. Things have changed a lot since 1999 because of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)

[LadyInTheRed]

And now for a much shorter reply:

would a bankruptcy protect me from all of it, and i just take the credit hit for a period of time.

Yes. And remember, you'll take a credit hit for a foreclosure too.

[sandra123]

I agree with The Lady in Red. In today's real estate market a foreclosure can be costly to an individual. The lender will typically in the least file a 1099 making the deficiencies income for the debtor. You might consider filing a Chapter 13 bankruptcy if you have a substantial income and have the bankruptcy attorney try to strip the lien off the second trust deed. Recently, many courts have been allowing individuals that are filing Chapter 13 bankruptcy to strip the lien of the second or third and make the debt unsecured, allowing it to be included in the bankruptcy discharge. I would definitely contact a bankruptcy attorney that has extensive knowledge in Chapter 13 bankruptcy in your area. Good luck to you!

[BKAttyMI]

If you have more than one mortgage, looking into Chapter 13 and "lien strip" options is also a great idea. Call a local bankruptcy attorney to see if this might be an option.

[juggy]

What about bank acct's and workers comp. settlements ? ? are they exempt ? Or does the amount varry depending on what state you live in ? ?

[ValleYum]

What about bank acct's and workers comp. settlements ? ? are they exempt ? Or does the amount varry depending on what state you live in ? ?

Everything varies - that's why attorneys are almost necessary for a bankruptcy filing.

In New York you can choose between state or federal bankruptcy exemptions. Some info is here: http://www.legalconsumer.com/bankrup...-law.php?ST=NY

You need to talk to a local BK attorney (or 2 or 3) for a consult. It will ease your mind and they are usually FREE! Good luck!