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Thinking of a Short Sale….Think Twice!

by Shakeal Masoud, Attorney at Law

iStock 000015266973XSmall 300x227 Thinking of a Short Sale....Think Twice!Indeed, in this economic climate I have numerous walk-in clients who happily inform me that their home is in a Short Sale or will be soon. More often than not, a quick talking salesman/real estate agent sold them on the benefits of a short sale and how important it is to save their credit etc. These pro one-sided arguments typically are self-serving to the real estate agent who will inevitably collect a commission from the transaction. However, despite the many so-called advantages of a short sale, homeowners need to be keenly aware of the dreaded 1099-C and its potential tax implications.

One thing many real estate agents conveniently leave out are the negative tax implications of a short sale. You see the difference between what you owed on the property and what you actually sold it for is considered income by the IRS. You as the old homeowner will be slapped with a 1099-C. In essence, taxes will have to be paid on the debt forgiven. For example, if you owe $500,000 on a mortgage and the bank takes $300,000 as part of the final short sale transaction, the difference of $200,000 is deemed forgiven debt by the IRS and you the homeowner are responsible for the taxes on that debt.

A better strategy for most cash strapped individuals in today’s economy is very simply a bankruptcy which will allow you to avoid the 1099-C. After bankruptcy have your accountant file an IRS form 982 which will cancel any debt obligations owed to the IRS. As always consult an experienced bankruptcy attorney at Sky Law Group, today!

******Update****** California has passed SB 931 which prohibits deficiencies on short sales. California homeowners pursuing a short sale on their first mortgage should no longer be worried about their lender seeking a deficiency judgment. Effective January 1, 2011 the new law provides as follows:

580e. (a) No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.

(b) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first deed of trust or first mortgage, this section shall not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.

(c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of the state.

The California AntiDeficiency rules are complex, contact a lawyer at Sky Law Group today !

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Is it possible to eliminate your second mortgage?

by Shakeal Masoud, Attorney at Law

garnishment 300x199 Is it possible to eliminate your second mortgage?A possible benefit of filing a Chapter 13 bankruptcy – getting rid of your second mortgage!

Many people do not know that by filing a Chapter 13 bankruptcy under certain conditions will allow one to strip or remove their second mortgage obligation. In a Chapter 13 bankruptcy, your first mortgage is not allowed to be eliminated, but in the case of second mortgages, if the value of the property falls below the first mortgage loan amount, the courts can remove the second mortgage obligation in what is called “stripping.”

Within Chapter 13 Bankruptcy law, section 11 USC 1322 can potentially allow one to forgo your second mortgage, under certain circumstances. If your second lien on the whole is unsecured, then when the value of your home drops belong the first mortgage deed of trust, the second becomes wholly under secure, which can be negated through a Chapter 13 filing.

For example, if your home is worth $600,000 and your fiirst mortgage payoff balance is $625,000, you have no equity. If you have a second mortgage loan balance of $50,000, this second loan is a wholly unsecured mortgage. You can commence proceedings within a Chapter 13 case to strip or remove the lien. The $50,000 second was “stripped” from the property and is treated as an unsecured creditor in the Chapter 13 case no different than a Citibank Mastercard. If, however, the home is worth $630,000 in this scenario, you cannot strip off the second lien because it is merely undersecured, not wholly unsecured. In other words, if the second lien is partially secured you cannot remove it. The current law (Bankruptcy Code 1322) also prohibits modification or stipping of first mortgages on residential property.

Bankruptcy court judges are allowed to reorganize an individual’s debt, however, it does not give them authority to fundamentally alter a person’s primary home mortgage. Section 506 of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the claim is unsecured. In Chapter 11 or Chapter 13, even voluntary liens, such as mortgages and security interests, can be stripped down to the value of the collateral, with the exception of voluntary liens secured only by the debtor’s residence.

So while people are hopelessly starting to surrender their real estate to the bank, think twice before you make your decision. You just might be able to remove the second mortgage and keep the house with a more affordable mortgage payment!

If the courts remove this 2nd mortgage, this is known as “stripping” the lien, “cram down” or “strip down.”

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