Tax Consequences of Foreclosure

- C
- Cynthia
  
  Contact options for registered users
posted
16 years ago

Wed, Apr 2, 2008 5:12 AM

Hi there,

Thanks in advance for your sage advice.

My friends are likely to file for BK. And, they are upside-down on their house, and cannot make the full PI payment.

I am trying to walk them through the BK process, we have recently seen a lawyer that I think they will go with, but he has said he is not a Tax guy....I get that.

They will have both a Foreclosre and a BK. It seems that it makes more sense to file for BK then to let the house go into FC. The BK lawyer explained this was better because as long as they have the house, their house payments are part of their monthly payments.....and are extremely high.

He did not give us a definitive answer on the second (eg, 1st is for

500k, 2nd - a heloc is for 100k), house sells for 500k. We are in California. Could the 2nd do a judicial whatever? Can the second still go after the homeowners after they have filed for BK and have foreclosed?

I know we need to see a BK Tax attorney, and we will. Just looking for inputs.

Thanks, Cynthia

- P
- Paul Thomas, CPA
  
  Contact options for registered users
Vote on answer
posted
16 years ago

Wed, Apr 2, 2008 11:39 AM

"Cynthia" wrote

Both are legal questions. Ask the lawyer.

If you have a tax related question, please ask it.

- S
- Stuart Bronstein
  
  Contact options for registered users
Vote on answer
posted
16 years ago

Wed, Apr 2, 2008 2:05 PM

As Paul notes, your questions are legal, not tax related ones, and should be directed to their lawyer.

Are they talking about a chapter 11 bankruptcy, or chapter 7? That will make a big difference.

Yes, the holder of the second can probably go after them for the money owed. In fact, if the first was ever refinanced, that lender could also, in theory, sue for additional damages after foreclosure. The bankruptcy will prevent that.

Stu

- E
- Elle
  
  Contact options for registered users
Vote on answer
posted
16 years ago

Wed, Apr 2, 2008 3:09 PM

"Cynthia" wrote

Is it only the house payments that are crushing your friends? Or do they have a good deal of other debt?

If it is the house payments that are overwhelming them, here is a Feb. 29, 2008 article that discusses how foreclosure without bankruptcy in California is preferable for many folks:

formatting link

. Registration for the NY Times site is free. For over ten years the Times site has not bothered me with junk email. I would consider having your friends talk to the company in the article,

formatting link

next. Notice the question section, which asks about first and second mortgages.

Also, and as the article suggests, many banks will be happy to talk about changing the terms of the mortgage(s) when the bank stands to lose a good deal due to an upside down situation such as you describe.

For the future, encourage your friends to become apartment renters until they have 20% for a downpayment. Renting an apartment makes financial sense for many people. Owning a home is overrated when it comes to financial planning.

Consider posting your query to misc.invest.financial-plan , since the moderator here asks that questions be tax-related, and it's a bit of a stretch to call this a tax question right now.