The 3 Options For Hurting Homeowners
With the morass of legal and tax ramifications involved in pursuing a short sale, foreclosure or bankruptcy, many of todays distressed homeowners need more than a Web browser to find the right solution for their financial challenges.
Ask Elin Bullmann, who, with her husband, invested big through the end of the national real estate boom and owned 12 homes in several states around the country when the market crashed.
Every situation is different, she said. You need to create a team of experts that together can help you get the right answers and use strategies that may work in your situation.
The e-book author went into foreclosure on one of her homes and spent the next year of her life writing How to Survive Foreclosure or Avoid It Altogether. The book, which is available at www.SurviveYourForeclosure.com, dispenses advice from an entire team of experts to homeowners who are trying to navigate through the different hurdles of reworking terms of their mortgages or executing short sales, foreclosures or bankruptcies.
A short sale is when a home is sold for less than the amount the homeowner owes the bank. The transaction requires the banks approval and a buyer but is one way to avoid foreclosure and bankruptcy.
Before going down the road toward short sale, foreclosure or even bankruptcy, there are myriad tax and legal ramifications to consider, said Anthony Albertazzi, an attorney at Albertazzi Law Firm in Bend, Oregon, and one of many experts whose advice is included in the e-book, How to Survive Foreclosure or Avoid It Altogether.
Oregons status as a nonjudicial state, like all other nonjudicial states that are mostly on the west coast, means primary lenders can foreclose on a property, but they cannot sue for compensation, according to Albertazzi. But that law does not protect homeowners from lenders on second and third mortgages or lines of credit.
Short sales leave less of a lasting stain on ones credit, typically a two-year ding, but theyre getting more difficult to complete, Albertazzi said.
I used to help people with short sales, but the market has gotten so toxic that short sales arent going through like they used to, he said. Banks are in such disarray that when you bring them even reasonable short sales, they dont have the staff to deal with them.
Foreclosures, although simple in the sense that they take the least amount of work, also present the most challenges, Albertazzi said.
You dont have to do anything (as a borrower) you just walk away, he said.
In Deschutes County, notices of default, which are sent out to homeowners when they are 90 days past due on their mortgage payment and are the earliest official step in the foreclosure process, have more than tripled from 2007 to 2008.
From Jan. 1, 2007, to Dec. 11, 2007, there were 539 such preforeclosure notices in the county. For the same period in 2008, there were 1,798 notices, according to county records.
Despite the relative ease of walking away from a mortgage, foreclosure leaves the longest-lasting mark on ones ability to repurchase a home, Albertazzi said.
It takes seven years for a borrower to get a home loan from Fannie Mae after a foreclosure, compared with four years for a debtor emerging from Chapter 7 bankruptcy and two years from a short sale, Albertazzi said. Foreclosure also could leave one vulnerable to tax and legal difficulties.
Theres a possibility, if the first mortgage forecloses and the second mortgage is out in the cold, (the second lender) could sue you and get a judgment, he said. It is commonplace for second mortgages to be hanging out there after the first lender has foreclosed on the property.
Taxwise, short sales and foreclosures each can leave a homeowner vulnerable because the amount of debt forgiven through both processes can be considered taxable income, said Chris Hatfield, a real estate tax attorney. Hatfield explanation backs up the same advice given by Lisa Tom, a CPA and high-level tax strategist in Vancouver, WA, who gave comprehensive foreclosure-related tax advice in the e-book, How to Survive Foreclosure or Avoid It Altogether.
Oregons status as a nonjudicial state also does not protect a homeowner from getting a sizable bill from the Internal Revenue Service, Hatfield said.
From a liability standpoint, you have to think of an individual situation, whether you are dealing with just a first, or a second and a third, he said. When you have seconds, life gets more complicated both from a relief-from-indebtedness income and continuing-liabilities standpoint.
There are exceptions to the taxation of relief-from-indebtedness rule a borrower would not be subject to taxation on the relief from indebtedness if he used the home as a personal residence, Hatfield said.
The personal residence exception is not a blanket exception, however, because it only applies to loans that were used to purchase or improve the home, he said.
If the borrower took out a home equity line of credit and used that money to buy a boat or take a vacation, he or she could be taxed on that income even if he or she lived in the house, Hatfield said.
Another exception is when a borrower can prove insolvency, which means that liabilities outweigh assets, said Hatfield, who has seen more clients seeking relief from taxation following short sales and foreclosures, he said.
If you are insolvent, you dont have to take relief from indebtedness as income, Hatfield said. It is something an attorney or accountant can determine with a pretty straightforward calculation.
Bankruptcy, which remains public on a persons credit record for 10 years, is another option.
In Deschutes County, total bankruptcies have spiked 107 percent this year through Dec. 11 compared with the same period in 2007, according to Charlene Hiss, chief deputy clerk for the U.S. Bankruptcy Court for the District of Oregon.
In 2007, there were 330 bankruptcies during that roughly 11-month period. This year, by comparison, there have been 679 bankruptcies, most of which were filed by individuals, not businesses, according to the U.S. Bankruptcy Court.
With his firm seeing a 40 to 50 percent rise in bankruptcies last month over the previous month, Albertazzi sees the bankruptcy process eliminating many of the tax and legal liabilities.
Most people agree it is better to have a bankruptcy than a foreclosure filing, he said. You can have good credit within a couple of years (even though it stays on your record for 10 years) and most lenders after a two-year period will start considering you again for credit cards and other loans.
The drawbacks to a bankruptcy: It can only be done once every seven years, its expensive and can leave someone with a social stigma, Albertazzi said.
Bankruptcies are published in the newspaper, he said. There is a sense of shame.
Pros and cons of short sales, foreclosures and bankruptcies Short sale Foreclosure Bankruptcy
Pro: Allows the lender to recover at least some of the debt; allows the borrower to avoid having a foreclosure on record.
Pro: Gives the borrower personal and moral satisfaction that he has done the best he can.
Con: If it is not a personal residence, the borrower could be subject to taxation on the amount forgiven. Otherwise, the difference of the amount owed and the sales price is considered income.
Con: Typically is not enough to pay the first mortgage in full. The second mortgage still out there and could have judicial recourse.
Con: Takes a lot of work and agreement by the lender.
Con: The borrower cannot buy another house for two years.
Pro: Dont have to do anything; just walk away.
Con: Will prevent the borrower from getting a real estate mortgage for seven years.
Con: An unsecured second lender could sue for judgment.
Pro: Chapter 7 is a way to cancel credit card and all other debt and avoid foreclosure.
Con: May lose certain personal assets such as expensive cars and jewelry.
Con: Name is published in the newspaper; sense of shame.
Con: The cost (attorney costs, $1,000 and up; filing costs, about $300)
Con: Can only be declared once every eight years
Con: May still use credit cards, but have to pay in full every month.
For more information go to www.surviveyourforeclosure.com
by: Elin M Bullmann