Short Sales and Foreclosures in 2014

The Law After the Expiration of the Mortgage Debt Relief Act

Before you consider a short sale or foreclosure in 2014, here is the law you should know.

First, there are two types of debts. They are unsecured and secured. Unsecured debt is the bare promise to pay. The most common form is credit card debt. Secured debt, on the other hand, has two parts. The first part is the bare promise to pay which on a car loan or real estate loan is the Promissory Note. What makes secured debt different than unsecured debt is the security given by the borrower to ensure the promise is kept. This security on real property is called a Deed of Trust.

Second, on real estate loans, there are two different types of promises to pay. Non-Recourse or Recourse. A Non-recourse loans is (1) the loan or loans obtained to purchase a 1-4 unit property in which the borrower occupies at least one unit  (2) seller carry back or (3) a refinance after 1/1/13 with no cash out. Everything else is recourse debt i.e. the refinance of the real property with cash out, lines of credit, the loan or loans used to purchase a rental property.

Third, personal liability depends on whether you do a short sale or foreclosure. If you do a short sale, California Code of Civil Procedure (“CCP”) 580e provides that there can be no deficiency owed, collected, requested or rendered for any lender approved short sale of a one to four unit dwelling.  What this means is that a property owner cannot be held personally liable if the lender has agreed to the short sale. 

If a property is foreclosed in a non-judicial sale, you will not have any personal liability as to the loan that is foreclosed on because California is an anti-deficiency state i.e. the lender waives its right to come after you on the loan that they foreclosed on.  However, if there are junior liens to the foreclosing lien, they will have the right to sue you after the foreclose. They are called “sold out” junior i.e. they lost their lien, but they still have the promise to pay and thus have the right to sue you on the promissory note.

Fourth, in every short sale or foreclosure, there are potential tax implications. The IRS/Franchise Tax Board (“FTB”) wants to know two things. (1) Did you make any money on the deal and (2) Did you borrow any money which was not repaid.  If you made money on the deal including taking out cash to buy another house, buy another car, pay off credit card, you may have gain. If you borrowed money which is not repaid either through a foreclosure, you may Cancellation of Debt Income (“CODI”).   The great news on the short sales in 2014  is that both the FTB and the IRS have agreed that there is no CODI on short sales pursuant to CCP 580e.  However, these rulings do not apply to foreclosures.  There are exceptions to the CODI which will apply on foreclosures, but they are limited.

In conclusion, a short sale or foreclosure without legal advice is like jumping into the middle of the ocean with no life vest. Don’t do it.   Do not take on liability which could have been eliminated or reduced with first obtaining legal advice.  I see people every day for a free consultation on short sales and foreclosures in Walnut Creek and Brentwood.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A  SHORT SALE OR FORECLOSURE. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

© 2014 Joan Grimes

HAMP Loan Modifications - The Truth be Told

Everyone has had the experience of thinking that something just is not right.  Ok, we know that something is wrong.  We know it is rotten.  It may have been the time your teenager was going to a study group on Saturday night or maybe you got passed over for a job even after your boss tells you that everyone is being treated equitably.   We have all been there.

We knew that things were rotten with the Home Affordable Modification Program (“HAMP”).  How many times could the Bank lose the paperwork, pay stubs?  How long could a modification be in underwriting?  The Trial Payment Plan (“TPP”) said it was 3 months, but it had been 12 months.  How could the Bank not have received the Trial Payments when they had received all of the regular monthly payments prior to HAMP?  How could a loan modification be approved and then denied 6 months later? 

Well in the case of Bank of America and BAC Home Loan Servicing, the facts are starting to come to light.  In a Second Amended Consolidated Class Action Complaint filed in Massachusetts, the Plaintiffs allege that Bank of America systematically failed to comply with the terms of HAMP.  It alleges that the Bank had financial incentive to avoid modifying home loans and to continue to keep a mortgage in a state of default or distress and to push loans toward foreclosure.  According the Compliant, this was especially true when the loans were owned by a third party investor and the Bank was merely servicing the loan. 

Recently, a declaration filed in the case by a former Bank of America employee alleges that employees were told  “to lie to customers and claim that Bank of America had not received documents it had requested, and that it had not received trial payment(when in fact it had).  We were told that admitting that the Bank received documents would “open a can of worms” since the Bank was required to underwrite the loan modification within 30 days of receiving those documents, and it did not have sufficient underwriting staff to complete the underwriting in that time.”  In addition, the employee alleges “Employees were rewarded by meeting a quota of placing a specific number of accounts into foreclosure, including accounts in which the borrower fulfilled a HAMP Trial Period Plan.”         

If you applied for a loan modification with Bank of America or any other HAMP servicer and you think you should have been approved, you should complain to the Bank, the California Attorney General and you should try to join a class action lawsuit.  If you are still in the house, apply again for a loan modification and put in the hardship letter all evidence you have that you were wrongly denied before.    

Character counts.  At the end of the day, what we do matters.  If your house is a big deal to you, then act like it is a big deal.  If you should have received a loan modification, you need to speak up.  If you don’t, they win.  

This is a complicated area of the law and I recommend you to seek legal counsel prior to taking any action on a loan modification or proceeding with a short sale or foreclosure.  There may be personal and tax liability. I provide a free 30 minute consultation at all of my offices located in Walnut Creek and Brentwood.       

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. © 2013  Joan M. Grimes. (925) 939-1680 Grimesbklaw.com

Joan's Interview With On The House

Listen to Joan Grimes interview on America's #1 Home Improvement Radio Show, On The House with The Carey Brothers that took place on March 2. Joan discussed options for underwater homeowners, Short Sale and more.

Listen to Joan Grimes recent interview on America's #1 Home Improvement Radio Show, On The House with The Carey Brothers.  Joan discussed options for underwater homeowners, Short Sale and more.

Part 1Part 2

New Law on Short Sale - What you Should Know to Protect Yourself

Effective July 15, 2011, California Code of Civil Procedure (“CCP”) 580(e) was amended to prohibit a deficiency judgment on any loan secured solely by a deed of trust on a 1-4 unit dwelling sold in a short sale.  Enough legal jargon…what exactly does this mean and how does apply to you?

First, it means that if your lenders agree to a short sale, it will release you from your personal liability on loans secured solely by a deed of trust against a dwelling of 1- 4 units.  If the lenders want the short sale to go through, they will have to be satisfied with the proceeds from the sale.  The banks can no longer demand that borrowers sign promissory notes… AND no more tricking borrowers into believing that releasing of the lien was in fact releasing their personal liability.  The lenders do not have to agree to the short sale, but if they agree, they cannot come after you once the short sale is completed.  However, if you think this is too good to be true…you’re right. Keep reading!

Second, there is no requirement for a release of personal liability on anything other than a consensual lien i.e. no requirement to release judgment lien or liens placed on the property such as by a homeowners association or taxing authority.  These parties do not have to agree to accept the proceeds from the sale as payment in full. The forgiveness of personal liability also does not apply to borrowers who are corporations, limited liability companies, limited partnership or political subdivision of the state.  In addition, it also does not prohibit the lender from obtaining a judgment for fraud with respect to the short sale or waste committed to the property.

Third, CCP 580(e) does not release you from any tax liability.  Remember, every short sale has tax implications. The IRS/State Franchise Tax Board wants to know two things: 1) Did you make any money on the deal and 2) Did you borrow any money which was not repaid?  If you made money on the deal, including taking out cash to buy another house, car, pay off credit card, you may have a gain. If you borrowed money which was not repaid, you will have Cancellation of Debt Income (“CODI”).  CODI will be taxable to you at your current tax rate unless an exception applies. Make sure you know all the tax implications before the short sale is completed.  If there is CODI, it can be discharged in bankruptcy, but only if the bankruptcy is filed prior to the short sale being completed.

In conclusion, CCP 580(e) is a mixed bag for consumers.  It may help reduce personal liability while increasing tax liability.  There is no question that this new law is going to hurt the lenders and help the IRS and State Franchise Tax Board.  This will be found money for the tax man.  Borrowers will see the forgiveness of personal liability and completely disregard the tax consequences.   Don’t be one of those people!  If you are considering a short sale, seek legal advice prior to starting the short sale process.  This is a complicated area of the law, but a bankruptcy or real estate attorney should be able to make to an analysis of your particular situation fairly quickly.   I see people for a FREE 30 minute consultations at my offices located in Walnut Creek, Antioch and Brentwood.

THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.         GRIMESBKLAW.COM  (925) 323-7772     

© 2011 Joan Grimes

Credit After Foreclosure, Short Sale or Bankruptcy

Are you worried about your credit after a foreclosure, short sale or bankruptcy?  Specifically, do you want to know when you reasonably expect to buy another home?  If this is concern for you, here is an overview of Fannie Mae credit guidelines. 

Foreclosure Sale-  A borrower will be eligible to obtain credit to purchase another principal residence 7 years from the date of the foreclosure sale.  However, if a borrower has “extenuating circumstances” they may be eligible for a loan in 3 years.  Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that resulted in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations such as illness, divorce, job loss or reduction of income.

Short Sale-  A borrower will be eligible to obtain credit to purchase another principal residence 2 years from the date the short sale is completed, but the borrower is limited to a maximum loan to value ratio of 80%.  If the borrower has “extenuating circumstances” as set forth above, the maximum loan to value ratio could be 90%.  If the loan(s) are current at the time of the sale, it may be possible to qualify even sooner depending on your circumstances.  Short sales can be reported various ways by the lenders, but the most common is a “paid in full” with a “settled for less than owed” code from the reporting agencies.  If the loan(s) are delinquent, the loans will also indicate delinquent status i.e. 60, 90, 120 or 150 past due.

Bankruptcy-  A borrower will be eligible to obtain credit to purchase another principal residence 4 years from the discharge or dismissal date of a Chapter 7.  In a Chapter 13 case, it is 2 years from the discharge date or 4 years from the dismissal date.  In a Chapter 13 filing, the borrower is given credit for repaying some or all of their debt.  On the other hand, if the Chapter 13 is dismissed, the time period will be 4 years.   There is an “extenuating circumstances” allowance in Chapter 7 cases, but not in Chapter 13. 

Re-Establishing Credit- It is very important that borrowers re-establish credit after a bankruptcy case and improve credit after a short sale or foreclosure.  To have credit, you need to use credit.  Probably the most important thing to do besides allowing time to pass is to open a few new credit accounts, use the credit and make payments in a timely manner.  To the extent there is a mix of old and new credit accounts, that is preferred.  Credit histories that include older, established accounts generally represent lower credit risk.  However, an older, established credit history that has many new accounts may indicate that the borrower is overextended.  Also to this point, we do not recommend any borrowers to use more than ½ of any credit available on an account. 

In conclusion, the above is an overview of Fannie Mae’s credit guidelines for credit after a Foreclosure, Short Sale and Bankruptcy.  However,  there are lenders who do not sell their loans to Fannie Mae or other governmental agencies.  Therefore, if you have a foreclosure, short sale or bankruptcy, it may be possible to obtain a home loan prior to the time frames set forth above depending on your income, down payment and other extenuating circumstances.  Also, it should be noted that Fannie Mae is having problems of its own.  Therefore, it is important to keep asking if there have been any changes to the guidelines.  Foreclosures, Short Sales and Bankruptcy are very serious matters.  You are in the deep end of the pool.  Before attempting to proceed with a short sale, foreclosure or bankruptcy, I urge you to seek legal counsel about the options available to you.  I see people every day for a FREE 30 minute consultation in Walnut Creek, Antioch and Brentwood.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.   GRIMESBK.AW.COM  (925) 323-7772     © 2011 Joan Grimes

Advice From People Who Filed Bankruptcy

 I have been asking people who come into my office if they have any advice/regrets about their actions prior to filing bankruptcy.  Here is their advice:

1. Seek Legal Counsel.  Don’t wait to find out your options.  Almost every person said they wish they had come in sooner.  Many have said they would have done things differently had they known the law and available options.

2. Don’t borrow or take money from your 401k, IRA, Savings Account, Children’s Saving Account, Deferred Compensation to cure to the default.  So many people regret borrowing or taking a distribution from their retirement plan.  Unfortunately, many people don’t know that this money, if borrowed, must be repaid in full or it will be considered income and taxed accordingly.  In addition, this tax cannot be discharge in bankruptcy.  It is heart breaking to see people take money out of their retirement to stay current on the mortgage, to only lose the house at the later time, but are still responsible for tax liability of the distribution.  

3. Don’t borrow money from family or friends to stay current on mortgage or other bills.    Family and friends want/expect to be repaid irrespective of whether you file bankruptcy.   In the eyes of the bankruptcy code, your family and friends are just another lender and will not receive preferential treatment.  

4. Don’t juggle credit cards to pay mortgage.  Cash advances and balance transfers may cause problems in a bankruptcy.  In addition, depending on the type of real estate debt you have, a short sale or foreclosure may be possible without a bankruptcy.  However, if you run up your credit cards trying to keep the house, a bankruptcy may be evitable.

5.  Don’t leave house until property forecloses or short sale is complete.  Almost every person that has left their home prior to the foreclosure or short sale being completed regrets the decision.  Once you stop paying on the mortgage, your rent is “free” with the exception of paying the Homeowners Dues and keeping insurance on the property.  Further, since you are still responsible for the maintenance  of the property until the foreclosure or short sale, you might as well enjoy it and save some money.  No reason to pay rent any soon than necessary.

6.  Don’t let your cultural pride stand in the way of you making sound financial decisions.  There is nothing to be ashamed of.  You did not make this economic meltdown.  You are not responsible for the economic collapse facing the Bay Area.  The economy of your parents’ generation is not the same as today.   

7.  Don’t co-sign for anyone.  No one can promise the future.  So many clients regret co-signing for a friend or relative. Co-signing for cars, furniture, Time-Shares and homes seemed like a good idea, but times change and suddenly there is a default.  Worst of all, don’t co-sign on Student Loans.  The default  rate by students who have had a friend or family member co-sign is much higher and YOU CANNOT DISCHARGE CO-SIGNED STUDENT LOANS IN BANKRUPTCY!

If you do not have sufficient income to pay your bills as they come due and owing, you should seek legal counsel before withdrawing any monies from a retirement account, savings account or taking a loan against your home or car.  These are difficult times, but do not miss the help and protection provided by the Bankruptcy Code and California law by waiting too long.  Just because this ship is underwater does not mean that you should give up your life vests that you will need to keep you afloat!

Want to learn more, listen to Joan Grimes recent interview on the Bay Area Real Estate show on FOX NEWSRADIO 910 AM with Krista Mashore.  Joan reveals some of the regrets she hears from clients filing bankruptcy. 

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.              

© 2011 Joan Grimes

Thinking About a Short Sale or Foreclosure?

The Law you Should Know

Before you consider a short sale or foreclosure, here is the law you should know.

First, there are two types of debts. They are unsecured and secured. Unsecured debt is the bare promise to pay. The most common form is credit card debt. Secured debt, on the other hand, has two parts. The first part is the bare promise to pay which on a car loan or real estate loan is the Promissory Note. What makes secured debt different than unsecured debt is the security given by the borrower to ensure the promise is kept. This security on real property is called a Deed of Trust.

Second, on real estate loans, there are two different types of promises to pay. Non-Recourse or Recourse. A Non-recourse loans is (1) the loan or loans obtained to purchase a 1-4 unit property in which the borrower occupies at least one unit or (2) seller carry back. Everything else is recourse debt i.e. the refinance of the real property, lines of credit, the loan or loans used to purchase a rental property.

Third, personal liability depends on whether you do a short sale or foreclosure and whether you have a non-recourse or recourse debt.  If you do a short sale, you can have personal liability unless it is waived by the lender.   Effective January 1, 2011, on a first deed of trust on a 1-4 unit property, the lender should be agreeing to waive any deficiency in a short sale in accordance with SB 931, but you will need to make sure the correct language is in the settlement letter.   If a property is foreclosed in a non-judicial trustee sale, you will not have any personal liability as to the loan that is foreclosed on because California is an anti-deficiency state i.e. the lender waives its right to come after you on the loan that they foreclosed on.  However, if there are junior liens to the foreclosing lien, they will have the right to sue you after the foreclosure if the junior lien(s) are recourse loans.  These loans are called “sold out” junior i.e. they lost their lien, but they still have the promise to pay and thus have the right to sue you on the promissory note.

Fourth, in every short sale or foreclosure, there are tax implications. The IRS wants to know two things. (1) Did you make any money on the deal and (2) Did you borrow any money which was not repaid.  If you made money on the deal including taking out cash to buy another house, buy a car, pay off credit card, you may have gain. If you borrowed money which is not repaid either through a short sale or foreclosure, you may Cancellation of Debt Income (“CODI”). There are exceptions to the CODI, but you should “know” not “think” the tax implications before a short sale or foreclosure.

In conclusion, a short sale or foreclosure without legal advice is like jumping into the middle of the ocean with no life vest. Don’t do it.  A short sale or foreclosure can stay on a credit up to 7 years. Do not take on liability which could have been eliminated or reduced with first obtaining legal advice. 

Help is available to you.  I see people every day for consultations on short sales and foreclosures for a flat fee of $300.  If you end up needing to filing bankruptcy, the fee is a credit against the bankruptcy fees.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A  SHORT SALE OR FORECLOSURE. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. 

I Can Handle This On My Own

 Foreclosure Sales and Short Sales

When a person is behind on a home loan, it is very common to think a foreclosure or short sale will allow them to focus on other debts and thereby avoid a bankruptcy filing.   However, all too often, a foreclosure or short sale is still followed by a bankruptcy because there is either another loan on the property which starts collecting on its loan or there are taxes as a result of the foreclosure sale which the borrower was unaware. 

In many cases, a bankruptcy filing prior to the foreclosure or short sale would have discharged the liability on any additional loans on the property, avoided the tax liability completely and allowed the person to stay in the property several additional months.  Additionally, a foreclosure or short sale prior to a bankruptcy filing may cause a person not to qualify for a Chapter 7 bankruptcy leaving a person in a Chapter 13 bankruptcy for 3-5 years.  What should a person consider prior to allowing a property to be sold at a foreclosure sale?

First, prior to allowing a property to be sold through a foreclosure or short sale, (1) determine the affect of the foreclosure or short sale on your credit, (2) is there any personal liability after the foreclosure or short sale which could be discharged in a bankruptcy filing and (3) is there any tax liability which could be discharged through a bankruptcy filing prior to the foreclosure or short sale.

Second, could a Chapter 13 bankruptcy filing avoid a junior lien on your principal residence which would have allowed you to retain the real property?  Under the Bankruptcy law, a junior lien on a person’s principal residence which does not attach to equity in the real property can be avoided through a Chapter 13 Plan.  For example, if the current fair market value of a principal residence is $250,000 and the balance on the first deed of trust is $300,000, then a junior lien could be avoided through the Chapter 13 Plan. A Chapter 13 also allows a person to cure a default on a home loan over time which may be all that is necessary to avoid a foreclosure sale.

Third, are there any other reasons that a bankruptcy filing may be appropriate prior to a foreclosure sale.  The most common reason is that there is significant unsecured debt which can be discharged in the bankruptcy and a bankruptcy filing prior to a foreclosure sale will allow a person to file a Chapter 7 instead of being required to enter into a Chapter 13 repayment plan.  In addition, a bankruptcy filing will allow a person to remain in the property additional time.

In conclusion, a foreclosure or short sale of real property without a bankruptcy filing may be the right decision.  However, a foreclosure or short sale will have serious consequences which should be analyzed by a bankruptcy or real estate attorney prior to the foreclosure sale.  This is a complicated area of the law, but a bankruptcy or real estate attorney should be able to make to an analysis of your particular situation fairly quickly.  I do free 30 minute consultation in my offices located in Walnut Creek, Antioch and Brentwood.  There is no reason to make a wrong decision about a foreclosure or short sale when legal assistance is available. 

THIS OFFICE IS A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.  GRIMESBKLAW.COM              

 © 2011 Joan Grimes

Thinking About a Short Sale or Foreclosure?

The Law you Should Know

Before you consider a short sale or foreclosure, here is the law you should know.

First, there are two types of debts.  They are unsecured and secured.  Unsecured debt is the bare promise to pay.  The most common form is credit card debt.  Secured debt, on the other hand, has two parts.  The first part is the bare promise to pay which on a car loan or real estate loan is the Promissory Note.  What makes secured debt different than unsecured debt is the security given by the borrower to ensure the promise is kept.  This security on real property is called a Deed of Trust and on a car loan it is the lienholder on the Certificate of Title.

Second, on real estate loan, there are two different types of promises to pay.   Non-Recourse or Recourse.  A Non-recourse loan is (1) the loan or loans obtained to purchase a 1-4 unit property in which the borrower occupies at least one unit or (2) seller carry back.  Everything else is recourse debt i.e. the refinance of the real property, lines of credit, the loan or loans used to purchase a rental property.

Third, under California law, a short sale or foreclosure can stay on a credit report for up to 7 years.

Fourth, personal liability depends on whether you do a short sale or foreclosure.  If you do a short sale, you can have personal liability unless it is waived by the lender.  Remember, a short sale is just like any other sale and if you don’t pay the full amount, the lender can request payment.   If you allow your property to be foreclosed in a non-judicial foreclosure sale, you will not have any personal liability as to the loan that is foreclosed on because California is an anti-deficiency state i.e. the lender waives its right to come after you on the loan that they foreclosed on.    However, if there are junior liens to the foreclosing lien, they will have the right to sue you after the foreclose.  They are called “sold out” junior i.e. they lost their lien, but they still have the promise to pay and thus have the right to sue you on the promissory note.

Fifth, in every short sale or foreclosure, there are tax implications.  The IRS wants to know two things.  They are (1) did you make any money on the deal and (2) did you borrow any money which was not repaid.  If you made money on the deal including taking out cash to buy another house, buy another car, pay off credit card, you may have gain.  If you borrowed money which is not repaid either through a short sale or foreclosure, you may Cancellation of Debt Income (“CODI”).  There are exceptions to the CODI, but be very cautious of tax implications because it is a very complicated area of the law.
In conclusion, a short sale or foreclosure without tax and legal advice is like jumping into the middle of the ocean with no life vest.  Don’t do it.  The California Association of Realtor is so concerned about this issue that the Short Sale Addendum specifically tells sellers to obtain tax and legal advice prior to proceeding with a short sale.  Help is available to you.  Do not take on personal liability or tax liability which could have been eliminated through a bankruptcy or reduced with first obtaining tax and legal advice. 

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN  MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.    

DO NOT MOVE….I REPEAT….

DO NOT LEAVE YOUR HOME…  UNTIL THE BANK FORECLOSES OR THE SHORT SALE IS COMPLETED 

Every day people come into my office indicating that they moved out of their home many months (or even years ago) and the bank still has not foreclosed.  They are now concerned because the city is sending them bills for maintenance on the property and the Homeowners Association is suing them for back payments even though they are no longer living at the home.  If you are behind on your mortgage, have tried a loan modification and have been denied or know you will not be able to keep the home, what should you do?

First, DO NOT MOVE… I REPEAT…DO NOT MOVE UNTIL THE BANK FORECLOSES OR THE SHORT SALE IS COMPLETED.  You are now living in your home without paying your mortgage.  It is free!  You should not start paying rent someplace else when you can live in your home for free.

Second, KEEP UP THE PROPERTY.  YOU ARE STILL RESPONSIBLE FOR THE PROPERTY UNTIL THE BANK FORECLOSES OR THE SHORT SALE IS COMPLETED.  So, even if you moved, you are still responsible for the maintenance of the property and payment of any Homeowner Association dues.  You do not need to pay the property taxes, but you should maintain the homeowners insurance.  Therefore, if you are still responsible for the maintenance and HOA payment, you might as well enjoy the property and the amenities.

Third, CONTINUE TO TALK TO YOUR LENDER TO SEE IF ANY NEW OPTIONS ARE AVAILABLE TO YOU.  Starting January 1, 2011, the State of California is offering new assistance programs through your lender if you are behind on your mortgage. 

Fourth, SEEK LEGAL COUNSEL.  Depending on your situation, a real estate or bankruptcy attorney will be able to advise you whether a short sale may be a better alternative for you than a foreclosure.  Also, if you have other debt which you are unable to pay off such as credit cards, lines of credit or car loans, a bankruptcy may be the best alternative for you.  However, if  you are no longer in the home, the debt against the property cannot be used to offset income.  Therefore, if you (or your family) have income over the average median income in California (Family 1- $47,234, Family 2-$61,954, Family 3-$67,562), you will want to file the bankruptcy case prior to leaving the home.  Leaving the home prior to the bankruptcy filing may mean the filing of a Chapter 13 repayment plan versus a straight Chapter 7 where no debts must be repaid.

In conclusion, do not move until the Bank forecloses or the short sale is completed.  It is still your home until the bank forecloses which can be months or years from the time you stop paying.  The average time of a foreclose in California is now 451 days from the date of default.  That means potentially 451 days of FREE RENT or more.  Since you are still responsible for the property, you might as well enjoy it.  This is a complicated area of the law.  You are in the deep end of the pool.  Do not swim alone.  The buddy system is essential.  Seek a buddy in legal counsel prior to taking any action.  I see people everyday for a FREE 30 minute consultation in my offices located in Walnut Creek, Antioch and Brentwood.

WE ARE A DEBT RELIEF AGENCY.  WE HELP PEOPLE FILE FOR BANKRUPTCY.  THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN   MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.  GRIMESBKLAW.COM

  © 2011 Joan Grimes

Should I Stay or Should I Go?

To say that these are difficult times in the real estate market would be an understatement.  The melt down began with an extended boom fueled by cheap money followed by a rapid contraction of the credit supply.  This lethal combination has led to an unprecedented decline in housing values.  I have no doubt that the real estate market will come back and thrive.  However, in the meantime, does it make financial sense to stay in a home that is underwater; where the value may not come back for 10-15 years and you may only be paying interest on the loan?  What is a person to do?

The mortgage industry and government would like us to feel a moral obligation to repay our debts.  The argument goes that we are sending the wrong message to our children and community if we default on a loan where we had the ability to make the payments.  Never mind that Wall Street banks and investors are voluntarily defaulting on office building, hotels and commercial properties across the nation.  Morgan Stanley recently decided to stop paying on five San Francisco office buildings and no one is saying they have a moral obligation.  It was a strategic decision to let the properties go rather than invest more money.

  A decision to voluntarily or strategically default on a loan can be a very emotional decision.  However, if we take the emotional side out of the equation, what does it look like from a purely financial and legal standpoint?  From a legal standpoint, there are three questions when contemplating a default on a home loan.  They are the following: 1) how will default affect my credit? 2) will there be any personal liability from the default? and 3) will there be any tax liability?  In addition, from a financial standpoint, how does the continuing payment of this debt affect other areas of my life?

As a general rule, under California law, a short sale or foreclosure can remain on a person’s credit for up to 7 years.   Personal liability on a home loan is determined by the character of the loan at the time the loan was originated and then by the manner in which the lender chooses to foreclose.  Generally, a loan or loans used to purchase a 1-4 unit property occupied by the borrower will have no personal or tax liability unless it is excluded loan product such as many types of governmental loans such as VA loans.  On the other hand, home loans which were not used to purchase a 1-4 unit property occupied by the borrower such as refinances, lines of credit or loans on investment properties, may have both personal and tax liability.

Even after considering the legal issues, we still need to think about a voluntary default from a financial point of view.  Is being “house poor” causing you to not properly fund your retirement, your children’s college education or preventing you from paying bills as they come due or taking your family on vacation? 

In conclusion, a voluntary default may be the right decision for you just as it was for Morgan Stanley.  It was a business decision for Morgan Stanley and it should be for you too.  This is a complicated area of the law, but a real estate or bankruptcy attorney should be able to make to an analysis of your particular situation fairly quickly which will allow you to decide if a voluntary default is the right decision for you and your family.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.              

 © 2010 Joan Grimes