Foreclosure Advice: “My Debt Has Been Discharged in Bankruptcy but My Lender Hasn’t Foreclosed? Do I Still Have to Pay HO Insurance, Property Taxes, HOA Fees, Etc.?”

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Are you facing foreclosure? Have you filed bankruptcy and had your debt discharged — including giving up your home? If so, you may be thinking that you’re “debt free,” and that includes dealing with fees associated with your home, eg, homeowners insurance, property taxes, HOA fees, etc.

Hold up though; this may not be the case. And, even experts disagree about what you should do if you find yourself in this situation. Proof? A recent post on Trulia.com, a leading real estate site whose contributors are experts from across the RE spectrum (eg, RE agents, RE attorneys, bankruptcy attorneys, etc.), addresses this question. And, they have very different things to say about it.

Answer to What to Do If Your Debt Has Been Discharged in Bankruptcy but Your Lender Hasn’t Foreclosed on Your Property

A realtor who contacted a few bankruptcy attorneys about what to advise his clients to do if they’ve declared bankruptcy but the bank hasn’t foreclosed received conflicting advice, ie . . .

[One] bankruptcy attorney told me that my client who was recently discharged from the debt through bankruptcy technically didn’t own the property anymore and should drop the insurance and not concern himself with the status of the property anymore.  However, I didn’t feel comfortable with this information.  [So] I consulted yet another bankruptcy attorney who stated that until the bank forecloses, my clients are still named as legal owner of record and therefore remain responsible for the taxes, insurance, security and condition of the property.  

We’re inclined to agree with the second attorney’s advice — strictly from a legal responsibility point of view. The bottom line is, even though you may have given your home up in bankruptcy and think that you are free to move on with your life, it’s not that simple.

One homeowner wrote into this blog stating that her HOA had levied fines — in her name, of course — for not paying HOA fees, even though she’d gone through bankruptcy and thought she had no further interest in the property. But, because she was still the LEGAL OWNER OF RECORD on the property, the fines were levied in her name and if she hadn’t paid them, the HOA threatened to sue her.

And, they had every right to.

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Now, imagine if you’ve gone through bankruptcy and are trying to rebuild your credit and something like this happens. It’s why we believe that homeowners facing foreclosure — even those who’ve gone through bankruptcy — should not leave their home. They should stay put. Unless and until your lender formally forecloses on the property, YOU, the homeowner, are still repsonsible for its maintenance and other fees.

The only thing declaring bankruptcy does is release you from the obligation to pay your homeowners loan back to the bank. It does NOT release you from being the legal OWNER of the property. Only a sale or foreclosure (or short sale or deed-in-lieu of foreclosure) can do this.

Hence, if someone hurts themselves on the property, for example, you can technically be sued for it;

The county can assess maintenance fees for failure  to upkeep the property (eg, the lawn is overgrown);

Your HOA can sue for unpaid fees;

Etc.

It’s extremely important to remember this — and one of the main reasons we advise homeowners to stay put.

Homeowner Fees You Can Probably Get Away with Not Paying If You File Bankruptcy But the Bank Won’t/Hasn’t Foreclosed

Property Taxes: If your home is eventually sold, these will “follow the house,” so to speak. Many times, the lender will pay these — even months after they’re due. You can check via your local county’s site to see if your property taxes are being paid.

Now if you can afford to pay these, you should — especially if you’re not paying the mortgage, and particularly if you hope to eventually save your home. This will be less you’ll have to pay to “catch up” if and when your lender does decide to grant you a home loan modification.

Homeowners Insurance: Just like property taxes, many lenders will step in and pay this. Read more about lender-imposed homeowners insurance.

Homeowner Fees You Should Pay, Even If You File Bankruptcy But the Bank Won’t/Hasn’t Foreclosed

HOA Fees: The reason is, HOAs are usually quicker to move to sue you. And even though these fees “follow the house” as well, if you’re trying to rebuild your credit after bankruptcy, the last thing you need on your credit report is a legal action like a suit. So just buckle down and pay this.

Are you facing foreclosure and have filed for bankruptcy — or are thinking about doing so? Share your experience or ask your question in the comments section below.

Related Posts

How to Stop Home Foreclosure For Over 2 Years Without Making Payments: Do it Yourself for Free — Here’s How

Stopping Foreclosure: What to Do When the Bank Refuses to Accept Your Mortgage Payments & Tries to Escalate the Home Foreclosure Process

Do I Still Have to Pay Taxes After a Foreclosure? The Answer Might Surprise You

Understanding Foreclosure Deficiencies and Mortgage Debt Forgiveness: Specific, Clear, Detailed Examples Given

I Received a 1099 From My Home Equity Lender: Tax Consequences of Foreclosure — with a HELOC

“Cash for Keys” Can Help if You Have a House in Foreclosure & Can’t Afford to Move  

Get Foreclosure Help: How to Find Agencies that Will Help You Stop Foreclosure – For Free

How to Stop Foreclosure Using Chapter 13 Bankruptcy: What to Expect When You File, How Ch 13 Differs from Ch 7 & More

Cash for Keys: How Not to Lose This Money if You’re in Foreclosure and File Chapter 7 Bankruptcy

Stopping Foreclosure: What the “Produce the Note” Defense Is & How It Can Help You Save Your Home from Foreclosure (Or at Least Stall)

P.S.: Foreclosure Clean Up Job Leads: FYI, don’t forget to bookmark the site and come back for direct leads on foreclosure cleaning jobs, foreclosure cleaning contracts and foreclosure cleanup request for bids on jobs. Always look under the “Recent Posts” heading to find the latest job listings.

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Copyright ©2012 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author. Legal Disclaimer: The information dispensed on this blog is not to be taken as legal advice; it is for general purposes only. Please consult a qualified attorney — in your jurisdiction — before taking any action based on the information listed here. 

Celebrity Foreclosure News: Octomom Home Receives No Bids at Auction

ForeclosureBusinessNews.com: “Foreclosure News the Average Joe Can Use!” Find Trusted Vendors, eg, Foreclosure Lawyers, Mortgage Consultants, Cleaning Co’s, Etc.

Octomom” Nadya Suleman’s California home was put up for auction Tuesday, but there were no bids so it’s been returned to the bank for foreclosure.  At this time, it’s unknown how long the foreclosure process may take.

An opening bid of $355,643 was required, but no one bid on the four-bedroom, three-bath house in La Habra, Calif., which is located roughly 25 miles east of Los Angeles. The auction had been previously postponed four times. 

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Suleman is the mother of 14 children, including octuplets born in 2009.

Get full details on this Octomom foreclosure story, as well as other celebrity news.

Related Posts

Celebrity Foreclosures: O.J. Simpson’s Miami Home in Foreclosure; Comedian Tracy Morgan’s Mom’s Home in Foreclosure (and He Won’t Help)

Celebrity Home Foreclosure News: CSI Actor Losing Home to Foreclosure

Celebrity Foreclosure News: Famous R&B Singer Hasn’t Paid Mortgage for Over a Year, Yet He Is Still Unlikely to Lose His Home to Foreclosure

Celebrity Foreclosures in 2011: From Sports Greats to Entertainment Superstars, Home Foreclosures are Not Limited to the Average Joe

Home Foreclosure News of the Day: Celebrity “Beach” Daughter in Foreclosure and Iraq War Veteran Suing Over Illegal Foreclosure

Celebrity Home Foreclosure News: West Wing & Thirtysomething star Timothy Busfield May Lose Home in January

Tiger Woods’ $865,079.36 Monthly Mortgage Payment

Octomom Avoids Foreclosure

Stopping Foreclosure: “Extreme Home Makeover” Family Held Raffle to Avoid Foreclosure?

Another Extreme Home Makeover Family Facing Foreclosure: Are These Families Irresponsible?

P.S.: Foreclosure Clean Up Job Leads: FYI, don’t forget to bookmark the site and come back for direct leads on foreclosure cleaning jobs, foreclosure cleaning contracts and foreclosure cleanup request for bids on jobs. Always look under the “Recent Posts” heading to find the latest job listings.

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Foreclosure Advice: What to Do When You’ve Stopped Making Mortgage Payments, But the Bank Won’t/Hasn’t Foreclosed

ForeclosureBusinessNews.com: “Foreclosure News the Average Joe Can Use!” Find Trusted Vendors, eg, Foreclosure Lawyers, Mortgage Consultants, Cleaning Co’s, Etc.

Many homeowners these days are in limbo. They’ve stopped making mortgage payments, maybe have even filed bankruptcy and are ready to move on with their lives, but they’ve heard nothing from their lender, eg, the bank hasn’t foreclosed. No one seems to know exactly what kind of foreclosure help to offer these homeowners.

Over the last few months, the web is rife with homeowners asking questions like:

If I stop paying my mortgage, how long before the bank forecloses? Or,

I haven’t paid my mortgage in ___ months (or over a year), but the bank hasn’t foreclosed; what should I do?

There are millions of homeowners across the country in situations like this – and they have no idea what to do. They’ve tried to communicate with their lender to no avail, they’ve tried to refinance and/or modify their mortgage to no avail – and they’re just sitting . . .  and waiting and waiting and waiting. It’s led to what one journalist calls “A Squatter Nation.”

Living Rent Free – for Years!

The article gives accounts of several homeowners who haven’t made mortgage payments – for years, eg:

Charles and Jill Segal have not made a mortgage payment in nearly five years — but they continue to live in their five-bedroom West Palm Beach, Fla. home.

Lynn, from St. Petersburg, Fla., has been living without paying for three years.

In Thousand Oaks, Calif., an actor has missed 30 payments, and still, he has not lost his home.

They’re not alone.

Some 4.2 million mortgage borrowers are either seriously delinquent or have had their cases referred to lawyers to pursue foreclosure auctions, according to LPS Applied Analytics. Of those, two-thirds have made no payments at all for at least a year, and nearly one-third have gone more than two years. These cases can go on and on.

FYI, get full details on What Happens When You Stop Paying Your Mortgage.

5 Things You Should Do If You Stop Paying Your Mortgage and Your Lender Hasn’t Foreclosed

As the editor of this blog, I’ve scoured hundreds of sites over the last few months and have talked with several homeowners who are in this situation. From this – albeit limited – research, following are five things I think every homeowner who’s in this situation should do.

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1. Stay Put: Whatever you do, don’t leave. There are many reasons to stay put. One of the main ones though is that you’re still legally responsible for the property. This means you’re still liable if someone, for example, hurts themselves on the property, or if damage occurs to the property and/or for its upkeep. So, you might as well be living there. This way you can maintain it — eg, cut the grass, prevent property damage, keep vagrants/vandals out.

By doing this, you will also avoid fees that a vacant/abandoned property can incur. For example, counties around the country are suing homeowners for the blight caused by foreclosed homes. Most of these fees are associated with regular maintenance issues (eg, the lawn is overgrown). Also, HOAs will sue for the same reason. If you stay put, you avoid all of this.

2. Save As Much as You Can — As Quickly as You Can: If you’re facing foreclosure, nine times out of ten you’re in financial difficulty. It’s taking banks a lot longer to foreclose these days than in the past – in some cases years.

In essence, this means you can live rent free while you get your financial footing. While it’s not i-deal from a moral standpoint in the long run (eg, living rent free), it is i-dollar (good for the pocketbook), especially for those who’ve run through savings, may be unemployed or underemployed (eg, making much less than in their previous jobs) and are still looking, and have nowhere to go.

Unless and/or until the bank forecloses – even if you’ve stopped paying your mortgage – it’s still your house. So stay put.

3. Create a Backup Plan (Eg, Have a “Plan B”): I’d do one for every quarter – up to a year out. Why? Two reasons. Number one, if you decide to stay put – and you aren’t making mortgage payments – you’re living on borrowed time. And, no one knows when that time is going to be up.

So, save as much as you can – and figure out what you’re going to do if say you have to move within the next three months (or six months, or nine months, or one year). Scout rental situations to learn what it’ll cost to move in, what the credit requirements are, how much utilities are, etc. This way, you’ll know exactly what to do if you get a foreclosure eviction notice on your door.

The second reason you should have a Plan B is so that you can breathe easier. Having a back-up plan will take some of the uncertainty out of your living situation, which should ease your mind a bit. This is huge, when you consider the fact that the threat of home foreclosure has left many ill. Many homeowners are at the point where [voluntary] foreclosure is a welcome option, not a financial death sentence, because it gives them room to de-stress, regroup and rebuild.

FYI, learn How the Foreclosure Process Works & How Long You Actually Have to Move if You Eventually Lose Your Home.

4. Create a “Keep Your Home” Plan: If you really want to stay in your home, figure out what you can realistically afford once your lender does make a move. For example, if you’ve found other employment, yet your salary is a half or third of what it used to be, figure out how much of a monthly mortgage payment (and homeowners insurance and taxes) you can afford given your new financial circumstances.

And, don’t kid yourself on what these costs are. Financial experts advise that housing costs shouldn’t make up more than 25-33% of your AFTER TAX income.

Be able to prove to your lender, “Hey, if you modify my mortgage and allow me to keep my home, I can afford to pay $X.”

And again, be saving as much as you possibly can while you’re not paying the mortgage so if they say, “Ok, we’ll work with you but we need a payment of $X to clear up some of these back fees (eg, property taxes, HOA fees, lender-imposed insurance, etc.),” you will have some money to start the bargaining process with.

5. Create a Financial Life Plan: As in, assess what got you into this mess in the first place. While many homeowners have been screwed by mortgage companies and unscrupulous lenders, we have to take some of the blame too.

What caused you to lose your home? Was your spending out of control? Was/is your car payment almost as much as your mortgage payment? Do you have credit card bills out the wazoo? Do you have a 6-8 month emergency fund?

Whatever caused you to be in this financial predicament is in the past, but that doesn’t mean you should forget it. You should study it to learn what you can do better moving forward. The reality is, if you’ve stopped paying your mortgage and are facing foreclosure, you are most likely going to lose your home. But, you can use the financial breathing space to plan a better future.

Declared Bankruptcy? Bank Won’t/Hasn’t Foreclosed? More Advice from a RE Professional

Here’s some excellent insight from a California real estate broker about what to do when the bank won’t foreclose (especially if you’ve already declared bankruptcy and gave up the property).

Related Posts

Mortgage Foreclosure Timeline: How the Foreclosure Process Works & How Long You Actually Have to Move if You Eventually Lose Your Home

Home Foreclosure News: 9 Reasons Strategic Defaults (eg, Voluntary Foreclosures) Will Continue to Rise

Stopping Foreclosure: What to Do When the Bank Refuses to Accept Your Mortgage Payments & Tries to Escalate the Home Foreclosure Process

The Top 5 Alternatives to Foreclosure: Which One is Best for You?

2 Foreclosure Options for Homeowners with Little or No Equity in Their Homes

Short Sale vs. Foreclosure: What’s the Difference between Them and Which One Hurts My Credit (FICO) Score More?

Foreclosure Advice: Should You Continue to Pay Your Mortgage While You Wait for a Home Loan Modification?

Credit and Foreclosure: 5 Easy Things You Can Do TODAY to Start Repairing Your Credit After Foreclosure

Foreclosure & Credit: How Does Foreclosure Impact Your Credit Report?

P.S.: Foreclosure Clean Up Job Leads: FYI, don’t forget to bookmark the site and come back for direct leads on foreclosure cleaning jobs, foreclosure cleaning contracts and foreclosure cleanup request for bids on jobs. Always look under the “Recent Posts” heading to find the latest job listings.

P.P.S.: Like this post? Follow Foreclosure Business News on Twitter.

Copyright ©2012 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author.  Legal Disclaimer: The information dispensed on this blog is not to be taken as legal advice; it is for general purposes only. Please consult a qualified attorney — in your jurisdiction — before taking any action based on the information listed here. 

Do I Still Have to Pay Taxes After a Foreclosure? The Answer Might Surprise You

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Foreclosure Tax Consequence: An All-Too-Common Problem Many Face These Days

People who fall behind on their mortgage payments face foreclosure and consequently lose their valuable property in that proceeding. After foreclosure, you are able to walk away from your mortgage payment scot free, but not from the potential taxes on the on the forgiven debt.

Why You May Owe the IRS After Foreclosure

If the lender sells your home for less than the amount that is owed on your mortgage, any pardoned debt can be treated as “earned taxable income.” What this means is that the IRS sees this as income that you ACTUALLY EARNED because it’s monies that the lender has said you don’t have to pay back; hence, it’s money in your pocket (at least theoretically speaking).

The tax that’s assessed is on the cancellation of this “forgiven debt” income. And FYI, this can occur if the bank forecloses, or if you do a short sale.

Short Sale or Foreclosure? Why Both are Subject to Taxes

Both produce “earned income.” The only difference is in how they do it.

A short sale is when the bank agrees to let you sell your home for less than what is owed. A short sale keeps a foreclosure from showing up in your credit report, but the shortfall will appear due to neglectful payment of loan.

In both instances (a short sale and a foreclosure), you are not paying the full amount owed on the loan; this portion is “cancelled debt.” And again, this cancellation of debt produces taxable income according to the IRS.

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What Happens If You Can’t Afford to Pay Taxes on “Income” Produced by a Foreclosure or Short Sale?

If the property owner (eg, you) fails to meet the financial obligation to the IRS, then the IRS may charge surplus interest. And, of course, there are penalties — and they can add up pretty quickly.

A Way Out: How to Avoid Paying Taxes after a Short Sale or Foreclosure

There is a possible way out of part or the entire tax obligation. What is it? In short, Form 982. Form 982 requires proof that you are bankrupt and you must provide all documents to support your claim of bankruptcy.

The consequences of foreclosure are not easy to swallow. That’s why — whatever your situation is — it’s best to consult a foreclosure attorney, a bankruptcy lawyer, or at the very least an accountant who’s knowledgeable about foreclosure.

Related Posts

Understanding Foreclosure Deficiencies and Mortgage Debt Forgiveness: Specific, Clear, Detailed Examples Given

Tax Consequences of Home Foreclosures & Short Sales: Note — 2012 Is a Critical Year for Homeowners Facing Foreclosure

Home Foreclosure and Taxes: Important Tax Consequences of a Short Sale after December 31, 2012

 How to Avoid a Deficiency Judgement After Foreclosure

Underwater On Your Home? Filing Chapter 7 Bankruptcy? Should You Reaffirm Your Mortgage?

Mortgage Foreclosure Timeline: How the Foreclosure Process Works & How Long You Actually Have to Move if You Eventually Lose Your Home

P.S.: Foreclosure Clean Up Job Leads: FYI, don’t forget to bookmark the site and come back for direct leads on foreclosure cleaning jobs, foreclosure cleaning contracts and foreclosure cleanup request for bids on jobs. Always look under the “Recent Posts” heading to find the latest job listings.

P.P.S.: Like this post? Follow Foreclosure Business News on Twitter.

About the Author: Pauline Go is an online leading expert in real estate law. She also offers top quality articles like: Unfair Eviction & Property Line.

Understanding Foreclosure Deficiencies and Mortgage Debt Forgiveness: Specific, Clear, Detailed Examples Given

ForeclosureBusinessNews.com: “Foreclosure News the Average Joe Can Use!” Find Trusted Vendors, eg, Foreclosure Lawyers, Mortgage Consultants, Cleaning Co’s, Etc.

This article discusses the tax consequences of what happens when your home is foreclosed on, when you do a short sale, or you do a deed-in-lieu of foreclosure and there is a deficiency. Issues covered include:

Can your lender sue you for any deficiency owed;

What happens if the lender forgives the debt;

When/if you owe taxes on a deficiency;

How much you may owe in taxes;

When you won’t owe taxes;

And a whole lot more. So, let’s get started . . .

Why So Many Homeowners are Facing Foreclosure Deficiencies

The foreclosure crisis hit in earnest in and around the fall of 2007. Its effects continue to this day. One of those effects has been than many owners find themselves upside down on their real estate homes and/or investments. When the property is sold, whether voluntary or involuntary, this shortfall needs to be addressed one way or another and the effect of same can have substantial financial impact.

What Does It Mean to Be “Upside Down” on Your Home?

Being “upside down” means that the amounts owed on all loans on your property — determined at a specific time and in a specific manner — exceeds the value of your property. This “value” of your home can change depending on whether the calculation is being made as a part of a deed-in-lieu, a short sale, or a foreclosure.

What Happens When You Do a Deed-In-Lieu of Foreclosure Transaction?

In a deed-in-lieu transaction, the owner transfers the property to the lender in satisfaction of the mortgage encumbering the property. If the lender determines that the value of the property in question is less than the mortgage debt, a deficiency arises.

Example of a Deed in Lieu of Transation: Let’s say the lender is owed $329,000.00 at the time of the deed-in-lieu transfer date. Let’s further surmise that the lender has determined that the value of the property is only $270,000.00. This means a deficiency of $59,000.00 would exist ($329,000 – $270,000 = $59,000).

Example of a Short Sale Transation:In a short sale, the deficiency is determined based on the net proceeds received by the lender at the time of the sale.

Using the numbers from the example above, if the property is sold for $270,000, the net proceeds given to the lender will be substantially less. Assuming a 6% real estate commission and traditional closing costs (documentary stamp tax, title insurance and tax credits), the net proceeds to a lender on the sale will likely be less than $250,000. This would result in a deficiency of over $79,000.00.  Here’s how the math shakes out:

Lender Owed: $329,000
Property Sells for: $270,000
Realtor Commission:  $16,200
Closing Costs: $4,050 (FYI, closing costs are usually between 1-2% of the sales price. We calculated this at 1.5%, so in this case it’s $270,000 x 1.5%, which equals $4,050).

So the final “loss” to the lender doing a short sale is $59,000 (cause house sold for $59,oo0 less than what was originally owed on it) + 16,200 + $4,050 = $79,250, for a final net of $249,750.

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Deficiencies in a foreclosure are judicially determined after the foreclosure sale. If a lender is seeking a deficiency (ie, going after the homeowner for the “net loss” on the property), the lender must apply to the court and provide appraisal information to support the valuation.

The property owner has an opportunity to challenge the valuation by submission of evidence to support a higher valuation. At the deficiency hearing, the court determines the property’s value as of the foreclosure sale date and then calculates the amount of the deficiency.

For Property Owners: Choices You Have If There Is a Deficiency

If a deficiency exists, there are several possibilities that a property owner might face depending on what the lender chooses to do with regard to the shortfall. This includes debt forgiveness, collection by the lender or sale of the debt to a third party for collection.

What Happens if You Have 1st and SEcond Mortgages On Your Property and a Deficiency Exists

In addition, in many cases, an owner will have a first and second mortgage on their property. Generally the second mortgage lender gets little or no money, and may take action separate and apart from the action of the first mortgage lender, even if the loans are titled in the name of the same lender (most loan holders are servicing agents who may own a portion of or none of the actual loan and the actual owners may direct that different action be taken on each loan).

What Happens When a Lender Forgives Your Debt (ie, Doesn’t Sue You for the Deficiency)

If the lender elects to forgive the indebtedness, the lender will send the property owner a Federal tax Form 1099-C. This is notice to you from the lender that the debt is cancelled and no collection effort will be made on the debt. The amount of the debt forgiven is determined in the same manner as the deficiency. Cancelled debt is generally treated as taxable ordinary income to the recipient of the debt relief unless some exception applies.

Example of Debt Forgiveness by a Lender: For example, if a property is foreclosed and the final judgment amount is $450,000.00, and the property has a value of $400,000.00 at the time of the foreclosure sale, the debt forgiveness will be $50,000.00. This $50,000.00 will be taxable income and treated as if someone paid you the actual money even though you did not receive any payment. If your blended tax rate is 20%, you would owe $10,000.00 in tax on this amount.

Debt Forgiveness Could Mean You Owe Taxes on the Deficiency Amount, But . . .

There are several exceptions to the taxability of the loan debt forgiveness. However, it is crucial that a Form 982 be filed with a tax return to make sure that the debt cancellation is addressed, regardless of whether the debt relief is taxable.

When You DON’T Have to Pay Taxes on Mortgage Debt Forgiveness

The most common exceptions are as follows:

1. Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.

2. Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

3. Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.

4. Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.

The Mortgage Forgiveness Debt Relief Act of 2007

The Debt Relief Act of 2007 was created to address the growing number of foreclosure on property for which the mortgage debt exceeds the value of the property. Effective for the tax year 2007 and valid through 2012, the Debt Relief Act allows homeowners to be exempt from taxation for debt forgiveness for loans up to two million dollars (one million for married couples filing separately) which secured the taxpayer’s primary residence.

Restrictions on The Mortgage Forgiveness Debt Relief Act of 2007

The Debt Relief Act has certain restrictions which may affect if any tax due as follows:

1. Only the debt given to acquire, build or substantially improve the residence is exempt. People who cashed out their equity via a refinance will only have a partial exclusion. For example, if the home was originally financed with a $300,000.00 loan, refinanced with a new loan for $400,000.00 in a cash out, and the value at foreclosure is $250,000.00 the taxpayer will have $50,000.00 in exempt income and $100,000.00 in taxable income.

2. The Debt Relief Act only applies to an owner’s primary residence. Second homes, rental property, vacation homes and investment property are excluded and debt relief on these properties will result in taxable income, unless another exception applies.

In order to obtain the exception, a taxpayer must complete new IRS Form 982 to evidence the debt forgiveness and to calculate the exemption amount. According to the IRS, in most cases the application under Form 982 only requires that a few lines be completed to obtain the appropriate relief.

As part of the debt forgiveness process, a careful examination of the amount forgiven and the value of the home listed on the 1099-C should be checked, especially if tax liability exists. If these figures are incorrect, the lender should be notified and an attempt to obtain a revised 1099-C should be made. If the lender refuses to make the corrections, you should consult a tax professional for assistance in challenging the 1099-C amounts with the IRS.

What Happens If Your Lender Does Not Forgive Your Mortgage Debt

If the Lender does not forgive the indebtedness after foreclosure, short sale or deed-in-lieu, then the deficiency becomes an unsecured obligation of the maker on the note.

In a foreclosure action, a deficiency is created by judicial determination. After the foreclosure sale, the lender applies to the court for a deficiency based on the value submitted by the lender. A property owner can challenge this valuation at the deficiency hearing by presenting evidence (appraisal or comparables) to support a higher value. At the hearing the court then determines the amount of the deficiency and awards the lender a judgment based on that amount.

If the deficiency arises from a short sale or deed-in-lieu, the lender must bring an action on the note against the maker, seeking the shortfall. As part of this process, a challenge to the amount due can be made. At the end of the lawsuit, the lender obtains a judgment against the maker under the note and can begin collection proceedings. In next month’s article we will discuss deficiency judgments and collections.

Related Posts

Tax Consequences of Home Foreclosures & Short Sales: Note — 2012 Is a Critical Year for Homeowners Facing Foreclosure

Home Foreclosure and Taxes: Important Tax Consequences of a Short Sale after December 31, 2012

How to Avoid a Deficiency Judgement After Foreclosure

How to Stop Foreclosure by Getting a Home Loan Modification, Loan Forbearance and Even a Principal Reduction: 100% Free Foreclosure Help Given by a Reputable Nonprofit Agency

Home Foreclosure News: 9 Million Homeowners Could Go Into Foreclosure Between 2009 & 2012

Underwater On Your Home? Filing Chapter 7 Bankruptcy? Should You Reaffirm Your Mortgage?

Mortgage Foreclosure Timeline: How the Foreclosure Process Works & How Long You Actually Have to Move if You Eventually Lose Your Home

P.S.: Foreclosure Clean Up Job Leads: FYI, don’t forget to bookmark the site and come back for direct leads on foreclosure cleaning jobs, foreclosure cleaning contracts and foreclosure cleanup request for bids on jobs. Always look under the “Recent Posts” heading to find the latest job listings.

P.P.S.: Like this post? Follow Foreclosure Business News on Twitter. Copyright © 2012 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author.

About the Author: Michael J Posner, Esq., is a partner in Ward Damon, a mid-sized multi-specialty business oriented law firm serving all of South Florida, with three offices in Palm Beach County. They specialize in real estate law, and can assist owners with foreclosures, short sales, deficiency hearings and loan modifications. They can be reached at 561.842.3000, online at http://www.warddamon.com/, or via e-mail at mjposner@warddamon.com. His blog is located at http://floridarealestateattorney.blogspot.com.

I Received a 1099 From My Home Equity Lender: Tax Consequences of Foreclosure — with a HELOC

ForeclosureBusinessNews.com: “Foreclosure News the Average Joe Can Use!” Find Trusted Vendors, eg, Foreclosure Lawyers, Mortgage Consultants, Cleaning Co’s, Etc.

This article will examine the tax consequences of a foreclosure when the personal residence has both its original purchase money loan and a HELOC (using Arizona mortgage laws as an example). It is important to note, that a refinance of an original purchase money loan with or without a HELOC is not covered in this article.

“Upside Down” Homeowners with First and Second Mortgages

It is common for homeowners to have a house that is “upside down”, many with first and second mortgages. Houses that were purchased a number of years ago appreciated rapidly in a short period of time and it was easy to pull on the home’s equity by securing an equity line of credit.

That equity may have been used for many purposes, including home improvements, constructing a swimming pool, funding college educations, purchasing new cars or boats, paying off credit cards and investing in businesses. Home equity loans are second loans behind the original purchase money loan and are commonly called Home Equity Lines of Credit or Home Equity Credit Lines (“HELOCs”).

Arizona Mortgage Law: Is a HELOC Covered Under the Stats’ Anti-Deficiency Statutes?

When homeowners are deciding if they can afford to keep their house by continuing to carry their first mortgage and their HELOC, they need to consider whether or not the HELOC will be covered under Arizona’s anti-deficiency statutes and what the tax consequences are of a foreclosure or short sale.

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Arizona Mortgage Law: The Difference between a Recourse and a Non-recourse Loan

Under Arizona law, if the loan is considered a “purchase money” loan, the house is on 2 ½ acres or less and is a single one family or two family dwelling, the lender cannot go after a deficiency (the shortfall between the outstanding debt and the sales price at a foreclosure sale or in a short sale) against the homeowner.

A purchase money loan is defined as using the proceeds of the loan to purchase the residence. In Arizona, this is what is frequently referred to as the “anti-deficiency” rules. With the anti-deficiency rules, the homeowner walks away and does not owe the lender any balance after the foreclosure. The anti-deficiency rules do not apply to HELOCs that are used for purposes other than making improvements to the home.

The anti-deficiency statutes generally do not apply to a HELOC in Arizona.

If the HELOC is not considered a purchase money loan under Arizona law, the homeowner has liability to the lender and the lender can proceed against the homeowner for a deficiency on the HELOC. Even after a foreclosure by the first lender, the lender on the HELOC can still sue the borrower for the outstanding amount of the HELOC loan.

How Does a HELOC Impact How Much Tax is Due on a Foreclosure?

As a general principle of tax law, when a lender forgives a recourse debt, the amount forgiven is included in income as cancellation of debt income, unless an exception applies.

Exceptions to Having to Pay Tax on “Forgiven” Recouse Debt

Exception 1: Mortgage Forgiveness Debt Relief Act (the “Act”) applies. The Act provides that homeowners can exclude from income the discharge of “qualified principal residence indebtedness” on the foreclosure or restructure of such debt on a personal residence of up to $2 million (if married) or $1 million (if married filing separately). A single person is not directly addressed by the law.

The Act only applies to debt incurred to acquire, construct or substantially improve any “qualified residence” and certain loans to refinance such debt. HELOCs are not “qualified principal residence indebtedness” if they are not used to substantially improve the taxpayer’s residence. Therefore, the amount of the income recognized from the forgiveness or discharge of a HELOC is not excluded from income.

Exception 2: The homeowner qualifies for another exception to the inclusion of income from the cancellation of the debt, such as insolvency or discharge of debt under bankruptcy cases. Many taxpayers may assume that they are insolvent for the insolvency exception if they believe that their liabilities exceed the fair market value of their assets. This includes IRAs and retirement plans. This determination must be made by a qualified tax or legal professional.

Arizona Mortgage Law: Tax Consequences of a Foreclosure or Short Sale with Original Purchase Money Loan and a HELOC

The following illustration details the tax consequences of a foreclosure or a short sale of a personal residence in Arizona where there is both an original purchase money loan and a HELOC. The assumptions are that the property is the owner’s primary residence, the Arizona anti-deficiency rules apply to the first loan, but not to the HELOC.

EXAMPLE: Original purchase price was $200,000, with no money down. House appreciates to $300,000. The owner obtains a HELOC for $50,000 to pay off credit cards. The house is now worth $200,000. The owner falls behind in the payments and the lender forecloses on the first loan for the balance of the loan, which is $190,000.

Bid price at the foreclosure sale is $190,000, and there is a nondeductible loss on the sale of $10,000, as to the first loan.

The lender decides not to proceed against the owner on the HELOC and forgives the balance of $50,000. The homeowner has $50,000 of cancellation of debt income. The Act does not apply. The homeowner would need to qualify for another exception, such as insolvency or discharge of debt under bankruptcy laws. If they do not qualify, then the cancellation of debt income is included as income.

Reporting Requirements: When a HELOC is discharged on the lender’s books, the lender is required by the IRS to issue a 1099-C for the forgiven portion of the loan to the borrower.

Assuming that no portion of the discharged HELOC is used to make improvements on the residence, the full amount of the discharged debt is generally includable in income unless the borrower qualifies for the insolvency exception or the bankruptcy exception.

Form 982 should be filled out to claim any exceptions and filed with the Form 1040 for the applicable year.

Conclusion: These issues are complex and each loan and each situation is different. Do not automatically assume that the amount of a loan that is discharged on a personal residence is excluded from taxable income. In many cases, HELOCs that are forgiven or discharged by lenders are reportable as income from cancellation of the debt unless an exception to reporting applies.

There may be different tax consequences depending on the value of the residence and additional questions may arise if the existing loan is a refinance of an original purchase money loan. It is highly recommended that you obtain an analysis by a qualified CPA or attorney.

IRS CIRCULAR 230 DISCLOSURE

To ensure compliance with requirements imposed by the IRS, we inform you that, to the extent this communication addresses any tax matter, it was not written to be and may not be relied upon to (i) avoid tax-related penalties under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein.

Related Posts

Tax Consequences of Home Foreclosures & Short Sales: Note — 2012 Is a Critical Year for Homeowners Facing Foreclosure

Home Foreclosure and Taxes: Important Tax Consequences of a Short Sale after December 31, 2012

How to Avoid a Deficiency Judgement After Foreclosure

How to Stop Foreclosure by Getting a Home Loan Modification, Loan Forbearance and Even a Principal Reduction: 100% Free Foreclosure Help Given by a Reputable Nonprofit Agency

Home Foreclosure News: 9 Million Homeowners Could Go Into Foreclosure Between 2009 & 2012

Underwater On Your Home? Filing Chapter 7 Bankruptcy? Should You Reaffirm Your Mortgage?

Mortgage Foreclosure Timeline: How the Foreclosure Process Works & How Long You Actually Have to Move if You Eventually Lose Your Home

P.S.: Foreclosure Clean Up Job Leads: FYI, don’t forget to bookmark the site and come back for direct leads on foreclosure cleaning jobs, foreclosure cleaning contracts and foreclosure cleanup request for bids on jobs. Always look under the “Recent Posts” heading to find the latest job listings.

P.P.S.: Like this post? Follow Foreclosure Business News on Twitter. Copyright © 2012 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author.

About the Author: Beth S. Cohn is a shareholder at the Phoenix law firm of Jaburg Wilk. She chairs the business law department and is a State Bar of Arizona certified tax specialist and a CPA. Beth can be reached at bsc@jaburgwilk.com or 602.248.1030. This article is not intended to provide legal advice and only relates to Arizona law. It does not consider the scope of laws in states other than Arizona. Always consult an attorney for legal advice for your particular situation.

Tax Consequences of Home Foreclosures & Short Sales: Note — 2012 Is a Critical Year for Homeowners Facing Foreclosure

ForeclosureBusinessNews.com: “Foreclosure News the Average Joe Can Use!” Find Trusted Vendors, eg, Foreclosure Lawyers, Mortgage Consultants, Cleaning Co’s, Etc.

With the economy in a recession and the real estate market at its worst in decades, many taxpayers have either experienced or are facing the threat of a foreclosed home or other piece of real property.

The number of foreclosed homes and short sales has skyrocketed in recent years amongst a failing economy and an unemployment rate hitting historical highs. To make matters worse, some experts are predicting a “bottoming out” of the economy as late as 2012. In the meantime, the number of people losing their homes continues to rise.

The foreclosure of Real Property can give rise to many questions and concerns for taxpayers.

Upon the foreclosure or short sale of a piece of real estate, the lender with the deficiency will issue a Form 1099-C, which is a Cancellation of Debt to both the taxpayer and the IRS.

About Phantom Income: Income You Usually Have to Pay Tax On

In past years, the amount of cancelled debt would give rise to what is sometimes referred to as “phantom income”. This phantom income would be taxable as ordinary income and would result in tax that had to be paid by the taxpayer. The taxpayer however, having never taken actual receipt of any cash, would many times be unable to pay the tax this phantom income that has all of a sudden been produced.

The Mortgage Forgiveness Debt Relief Act of 2007: Tax Relief on Phantom Income

Fortunately for taxpayers, Congress addressed this very issue in The Mortgage Forgiveness Debt Relief Act of 2007. The bill; H.R. 3648, was passed by Congress and was signed by President George W. Bush in December of 2007. The bill, grants relief to homeowners that have been given relief from mortgage debt through a foreclosure, short sale or other similar agreement with the lender. 

FBN Editor Note: There is a timetable on this. See the post, Foreclosed Properties Continue to Drag Down Construction of New Homes: What It Means for the Average Joe, for a full explanation (cursor down to section entitled, Home Foreclosure and Taxes: Important Tax Consequences of a Short Sale after December 31, 2012).

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What Is Acquisition Indebtedness and Why You Need to Know about It If You’re Facing Foreclosure

Generally, eligible debt is what is referred to as acquisition indebtedness. Acquisition indebtedness is defined as debt incurred to acquire, construct or rehabilitate a residence. However, refinanced debt will qualify, so long as the debt does not exceed the original amount and home equity debt will qualify so long as the funds were used to improve the taxpayer’s home.

No relief is available for cash-outs. The forgiven mortgage debt must have been secured by the residence and no more than $2 million of mortgage debt is eligible for the exclusion ($1 million of mortgage debt for a married person filing separately). The relief applies to qualified debt forgiven between January 1st 2007 and December 31st 2012.

State Example of Tax Debt Relief on Mortgage Debt: California

Every state is different. For example, while the State of California does not conform exactly to Federal law, it also provides relief from tax on forgiven mortgage debt for calendar years 2007 and 2008. Senate Bill 1055, enacted September 25th, 2008 allows taxpayers to exclude up to $250,000 of cancellation-of-debt income resulting from a discharge of a loan that was used to acquire, construct, or substantially improve the principal residence of the taxpayer.

The maximum amount of a loan eligible to be excluded is $800,000. The exclusion is further phased-out for discharged loans that exceed $800,000. Some taxpayers may need to file an amended California return for 2007 in order to take advantage of these provisions. Doing so may result in a refund or reduction of tax liability.

Relief from Mortgage Debt: The Most Important Thing to Remember If You’re Facing Foreclosure

For taxpayers who have lost their homes either through foreclosure or a short sale scenario these relief provisions are welcome news. However, it is important for taxpayers to remember that these provisions only apply to principle residence home loans that were used to acquire, construct or rehabilitate a taxpayer’s principle residence.

Taxpayers who have used loan proceeds for other purposes may still be facing a taxable income situation. Taxpayers who have experienced or are facing foreclosure or short sale scenarios on rental, business or investment properties are likewise at risk as these provisions will not apply.

In situations like this, it is critical that taxpayers have a competent tax professional assist them with their tax planning and preparation. Taxpayers may still be able to obtain relief under other provisions such as the establishment of insolvency (bankruptcy). However, navigating specific tax laws in these areas can be tricky.

Related Posts

Home Foreclosure and Taxes: Important Tax Consequences of a Short Sale after December 31, 2012

How to Avoid a Deficiency Judgement After Foreclosure

How to Stop Foreclosure by Getting a Home Loan Modification, Loan Forbearance and Even a Principal Reduction: 100% Free Foreclosure Help Given by a Reputable Nonprofit Agency

Home Foreclosure News: 9 Million Homeowners Could Go Into Foreclosure Between 2009 & 2012

Underwater On Your Home? Filing Chapter 7 Bankruptcy? Should You Reaffirm Your Mortgage?

Mortgage Foreclosure Timeline: How the Foreclosure Process Works & How Long You Actually Have to Move if You Eventually Lose Your Home

P.S.: Foreclosure Clean Up Job Leads: FYI, don’t forget to bookmark the site and come back for direct leads on foreclosure cleaning jobs, foreclosure cleaning contracts and foreclosure cleanup request for bids on jobs. Always look under the “Recent Posts” heading to find the latest job listings.

P.P.S.: Like this post? Follow Foreclosure Business News on Twitter. Copyright © 2012 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author.

About the Author: Christopher R. Jacquez is an Enrolled Agent, licensed by the U.S. Dept. of the Treasury to represent taxpayers before the IRS. He has been a tax professional for over 14 years. He carries an extensive background in income tax compliance and planning as well as representation for tax collection and exam issues. If you are experiencing a tax audit, owe back taxes or have unfiled returns, Christopher can help you to resolve your tax problems quickly and in your best interests.

Contact
Christopher R. Jacquez, EA
CEO, eTaxRelief – Tax Negotiation & Preparation Services, Debt Relief
http://www.eTaxRelief.com. Christopher is the CEO of eTaxRelief and can be reached through his firm’s website at: http://www.eTaxRelief.com or by phone at (877) 382-9349.