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Short Sales, Bankruptcy, and Foreclosure - Misconceptions

Short Sales, Bankruptcy, and Foreclosure - Misconceptions
"""It's no secret that the housing market is in shambles. The borrowers are at risk of foreclosure. Real estate agents and brokers bombard them with advertisements imploring them to sell their homes (or investment properties) """"short,"""" that is, for less than what is owed on the property. Some individuals are unsure whether to file for Chapter 7 or Chapter 13 bankruptcy. Understandably, homeowners are perplexed by the circulating contradictory information.

Yesterday, I received a mailing from a real estate agent that contained incorrect information. The effects of one versus the other on a borrower's ability to obtain a new mortgage were described in length and depth. I will not delve into the specifics of the comparison, but you have undoubtedly already guessed that the agent favors a short sale. I am no longer surprised when this occurs. Without disrespecting the real estate industry. A handful of my closest acquaintances are agents.

There is the possibility of fairly complex and costly tax ramifications for virtually every method of debt elimination other than bankruptcy. There is a special provision in the Internal Revenue Code (which we all adore) for bankruptcy-discharged debt. This debt cannot be taxed as it has been """"forgiven"""". How would it be regardless, you ask? Because the majority of """"forgiven"""" debt will generate a 1099 form from the lender. I refer to this as ""phantom income."" You did not, in fact, take any money. In the perspective of the IRS, however, you DID. Here is how it functions. Suppose you sold a home short. It sells for $400,000 and you owe $500,000 on it. Bank approves the sale, allows the transaction to close, and in this instance will not prosecute you for the $100,000 they were not paid. However, the bank WILL issue a 1099 for $100,000 as """"debt forgiven."" Ouch! When you first signed the listing agreement and then the escrow instructions, did the bank or agent mention THIS? I am not pondering frequently. Now, you may be facing a major issue with the IRS.

Numerous individuals are unaware that not all short sales are created equal. You can sometimes negotiate some of these terms with the lender. Still, many borrowers do not inquire because they are unaware of the hazards associated with receiving a 1099.

Anyone who is genuinely contemplating a short sale must also investigate bankruptcy. One of the most attractive aspects of bankruptcy is that it eliminates the debt on the property (and other debts as well), so the debt is no longer reported on the borrower's credit report. And as a result of this special exception in the federal tax code, no taxes will be owed on the cancelled debt. The optimal short sale occurs AFTER a bankruptcy filing, not prior to one. Ironically, however, many debtors sell short to AVOID bankruptcy. Why? Because they have been told, incorrectly, that the short sale will be better for their credit than bankruptcy. Real estate agents should be aware that advising a defaulting creditor NOT to file bankruptcy could be construed as providing legal advice without a license.

My subsequent article will compare how credit reporting agencies handle foreclosures, short sales, and bankruptcies. ""Until then, adieu.""

" - https://www.affordablecebu.com/
 

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"Short Sales, Bankruptcy, and Foreclosure - Misconceptions" was written by Mary under the Finance / Wealth category. It has been read 165 times and generated 1 comments. The article was created on and updated on 02 June 2023.
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