Our journey: a step-by-step account of walking away in CA

[outta_here]

First, I want to say thank you to everyone who has posted on the board – My husband (he posts as submersible) and I would be lost if it weren’t for all of you sharing your feelings and stories. It is nice to be somewhere with people who really understand what going through this process is like. We felt that the least we could do now was document our journey for anyone out there who is feeling lost and scared about walking away.

After discussing what to do for a year, we have decided to walk away from our home. We live in the San Francisco Bay Area in California. Our home is underwater 55% - probably more now if I was to take a look at our neighborhood comps, but I just can’t torture myself again. After a year of flip-flopping and looking at all our options, walking away appears to be our best option.

Our target date to stop making mortgage payments is December 1st.

So, our first step is to meet with an attorney to find out what the legal ramifications are, have him review our loan documentation to make sure our loans are all in order and non-recourse, and see what he can tell us about CA tax libaility. Step two, meet with a CPA if we can’t get a straight answer about the tax liability issues from the attorney so we know what to expect.

We meet with the attorney this evening and I’ll post an update on what he says and suggests.

Thank you again to all of you out there on the board – your support is going to be a part of what carries us through all of this!

[kcbmj8]

Where in the Bay Area do you live? We live here in the Bay Area too and have already stopped paying. We haven't consulted an attorney, but so many others mention it. Is it something we should do? And if so, what kind of attorney? How much does it cost to have them review your documents? (ball park range)

[darlyj]

Good luck to you! We have stopped paying on our mortgage as well....playing a game of chicken between us, NACA, and Chase to see if we actually get a permanent mod or walk. We are so far behind with the 1st mortgage at this point that we will never realistically get caught up. Our last payment was made September 1st....after going into default (which we were advised to do) and waiting on Chase's phantom mod paperwork. The best part is that as of next week we should be caught up on everything else and able to start saving for a rental should we need to move. And we can actually go out to dinner or a movie once again. In short, we get our lives back. It may not be the right decision for everyone, but you'd be surprised how quickly a lot of stress will just evaporate. Again, good luck!

[outta_here]

Originally Posted by kcbmj8

Where in the Bay Area do you live? We live here in the Bay Area too and have already stopped paying. We haven't consulted an attorney, but so many others mention it. Is it something we should do? And if so, what kind of attorney? How much does it cost to have them review your documents? (ball park range)

Hi kcbmj8 - we live in the East Bay. I would suggest getting in touch with a real estate attorney or an attorney who specializes in foreclosure in your area. We did a quick phone call with a few different firms and lawyers, all of whom said it sounded like we knew what we were doing and probably wouldn't really need their help- of course, we were free to come in for a consultation if we wanted. I got a good feeling from one guy in particular and we are having him review our loan docs just to make sure everything looks good. His consultation fee is $260 an hour, and he says that should be all we really need for document review and a few quick questions.

[outta_here]

Thanks darlyj - we need the good luck wishes. I am still in the phase where I am not really sure this is totally the right thing to do...I know in my brain it is the right thing, I'm just trying to get my heart to agree. I really, really, really love this house, but the noose around our family's neck is too much to deal with.

Good luck to you! I know that future dinner and movie are going to be one of the best night's out you've had in a long time - and you will deserve it!

[outta_here]

Originally Posted by kcbmj8

Where in the Bay Area do you live? We live here in the Bay Area too and have already stopped paying. We haven't consulted an attorney, but so many others mention it. Is it something we should do? And if so, what kind of attorney? How much does it cost to have them review your documents? (ball park range)

Hey kcbmj8 - we live in the East Bay. I would say to find an attorney right away and have him review your loan documentation, etc., just so you know where you stand legally. We interviewed a few different foreclosure and real estate attorneys in our area. The one guy we liked charges around $260 an hour - but he said it should only take him about an hour to review our paperwork and answer any questions.

[outta_here]

Whoops - sorry for the double post

[kcbmj8]

Thanks for the info. We may need to do that just to make sure we're set before we walk. What city is the attorney located in? (We're also in the East Bay.) I wouldn't mind paying the $260 just to make sure we have peace of mind that nothing pops up! Thanks!

[outta_here]

We found two attorneys in Berkeley and one in Oakland who specialize in foreclosure, loan doc review, etc. Yes, it is worth it to just know where you stand and talk over options with an attorney. Since you guys have already missed payments, it probably wouldn't hurt to try to find someone ASAP.

[outta_here]

UPDATE:

We went and met with the foreclosure attorney. He went over our three options with us - DIL, short sale, and foreclosure. He advised us that our mortgage servicer is probably not doing DILs for our area, so we could take that off the list. We discussed the costs associated with doing a short sale - attorney fees, realtor fees, waiting while the house is on the market and then the bank negotiates the price, etc. - and also the tax implications for our situation of a short sale. My husband and I agreed a short sale was not worth it for us at this point. That left us with foreclosure. I knew that was our only option, but having him advise it and say it out loud made it real.

It was funny because I started freaking out last night and re-running the numbers to see if we could keep the house if we had a really, really good loan modification and interest rate cut to 2% for both loans. Even with a lower interest rate, we were still looking at two years before we would be able to save enough for the repairs that need to be done immediately. And, even if this were the bottom for prices, which I don't think it is, and the house appreciated in value 2% a year, we are still looking at 20+ years before we even get close to a breakeven point.

It's sad - it is finally sinking in that we won't live here anymore. I know that this is really the best thing for this situation, but it still makes me a little melancholy.

[outta_here]

We decided to stop payments as of November 1. This is a month earlier than what we had planned, but it was just time to get the ball rolling.

I am pulling our FICO scores now while the numbers are still good as a reference point before the foreclosure and we are working on reference letters from our previous landlords - trying to make a little pack of information of who we really are before the credit rating drops...I mean, sinks like the Titanic. We are also working on our cease and desist letter for the mortgage services so they cannot harass us, our family, or our neighbors. Not that I really care if they started calling the neighbors at this point, because I really don't care who knows that we are walking away from the house - they are free to have whatever kind of opinion they want.

It just became clear to me that unless someone is in this specific situation of being underwater by 50%, paying a mortgage that is more than 3x what you would pay in rent, not believing that wiping out your 401k, savings for retirement and selling your firstborn is the right thing to do in order to "save" your house, most people just don't understand.

One of my close friends said, "Your credit will be ruined and you will not be able to rent or get a job - WHAT ARE YOU THINKING?" I had to ask myself what my credit score was worth...if the initial damage from a foreclosure only lasts two years and the foreclosure is taken off our credit report in seven years, is it worth the almost $500,000 we would pay in those seven years for mortgage, insurance, and property taxes for a house that will probably still be underwater by almost $300,000 if we call 2009 the bottom and the value appreciates 2% a year for the next seven years (so add roughly $300,000 financed at 8%). Then there are the house repairs that need to be done since our foundation is failing, we have no central heat, the windows are old and need to be replaced, etc....

I'm having a hard time thinking that our FICO score is worth the $800,000+ it will cost us to stay in this house over the next seven years.

[InTheDeepEnd]

OuttaHere-

I know you mentioned in your first post that you were planning on speaking with a CPA re: tax implications in California for foreclosing on a house. I have been scouring the internet and this forum for a straight answer and it seems like one does not exist. From what I can tell, all bills that have been introduced in CA that would align CA laws with Federal laws regarding "Forgiven Debt" have either not passed or have been vetoed by the governator. I believe this means that Californians will be tax liable for forgiven debt on their state income taxes. Did you find out any information on this?

Thanks!

PS I do plan on speaking to a CPA, but I figure an answer to this question will save me a few minutes on my $150/hour rate.

[caldwellb02]

Whatever you find out re: the tax liability would be news that alot of us could use. If we need to PUSH the governator, I'm ready to do it. I'll be watching this thread. Thanks.

[emc0317]

I've talked to one of the CPA when I was attending HAMP program in Stockton 2 months ago. I dont know if its true but he said if you're filing fed/state at the same time with the same program (electronic)it will show what ever the fed forgiven to the state tax return. The question is the state could audit you in the future. More Power!

[Irish Gal]

Originally Posted by outta_here

We decided to stop payments as of November 1. This is a month earlier than what we had planned, but it was just time to get the ball rolling.

I am pulling our FICO scores now while the numbers are still good as a reference point before the foreclosure and we are working on reference letters from our previous landlords - trying to make a little pack of information of who we really are before the credit rating drops...I mean, sinks like the Titanic. We are also working on our cease and desist letter for the mortgage services so they cannot harass us, our family, or our neighbors. Not that I really care if they started calling the neighbors at this point, because I really don't care who knows that we are walking away from the house - they are free to have whatever kind of opinion they want.

It just became clear to me that unless someone is in this specific situation of being underwater by 50%, paying a mortgage that is more than 3x what you would pay in rent, not believing that wiping out your 401k, savings for retirement and selling your firstborn is the right thing to do in order to "save" your house, most people just don't understand.

One of my close friends said, "Your credit will be ruined and you will not be able to rent or get a job - WHAT ARE YOU THINKING?" I had to ask myself what my credit score was worth...if the initial damage from a foreclosure only lasts two years and the foreclosure is taken off our credit report in seven years, is it worth the almost $500,000 we would pay in those seven years for mortgage, insurance, and property taxes for a house that will probably still be underwater by almost $300,000 if we call 2009 the bottom and the value appreciates 2% a year for the next seven years (so add roughly $300,000 financed at 8%). Then there are the house repairs that need to be done since our foundation is failing, we have no central heat, the windows are old and need to be replaced, etc....

I'm having a hard time thinking that our FICO score is worth the $800,000+ it will cost us to stay in this house over the next seven years.

Smart, and well thought out plan. Good luck to you!

[outta_here]

Originally Posted by InTheDeepEnd

OuttaHere-

I know you mentioned in your first post that you were planning on speaking with a CPA re: tax implications in California for foreclosing on a house. I have been scouring the internet and this forum for a straight answer and it seems like one does not exist. From what I can tell, all bills that have been introduced in CA that would align CA laws with Federal laws regarding "Forgiven Debt" have either not passed or have been vetoed by the governator. I believe this means that Californians will be tax liable for forgiven debt on their state income taxes. Did you find out any information on this?

Thanks!

PS I do plan on speaking to a CPA, but I figure an answer to this question will save me a few minutes on my $150/hour rate.

Hi InTheDeepEnd - The tax liability issue for foreclosures in California varies from case-to-case and depends on whether the loan or loans are recourse or non-recourse, sale price and market price, refinancing, adjusted base price, primary residence or investment, etc. It is important to discuss the exacts of the situation with an accountant because the liability varies based upon those factors. For us, we have non-recourse loans, so the foreclosure will be treated as a sale of the property...I've written a little more below about this.

Federal tax liability after foreclosure is also different on a case-by-case basis. What we found out was that The Federal Mortgage Relief Act does not apply to foreclosure of non-recourse loans. For federal taxes, foreclosure of a non-recourse loan does not trigger a cancellation of debt, but is treated as a sale for tax purposes.

For us, we have two purchase money, non-recourse loans - both of these will be treated as sales for tax purposes for both Federal and State.

Here is how we figured out our tax liability:

1. The amount of debt on the mortgages immediately prior to the foreclosure.
2. Adjusted basis in the property (purchase price plus any major improvements)
3. Subtract debt from adjusted basis - this is the tax liability for Federal and State.

Hope that helps!

[outta_here]

Originally Posted by emc0317

I've talked to one of the CPA when I was attending HAMP program in Stockton 2 months ago. I dont know if its true but he said if you're filing fed/state at the same time with the same program (electronic)it will show what ever the fed forgiven to the state tax return. The question is the state could audit you in the future. More Power!

Hey emc0317 - I'd be really careful following that advice. I wanted to be an accountant, and unless that is the guy doing your taxes and signing your return saying that he will represent you if you get audited, don't follow that advice. Federal and State are different right now in California because our state is so cash-strapped.

[outta_here]

Originally Posted by Irish Gal

Smart, and well thought out plan. Good luck to you!

Thanks Irish Gal!!!

[emc0317]

Originally Posted by outta_here

Hi InTheDeepEnd - The tax liability issue for foreclosures in California varies from case-to-case and depends on whether the loan or loans are recourse or non-recourse, sale price and market price, refinancing, adjusted base price, primary residence or investment, etc. It is important to discuss the exacts of the situation with an accountant because the liability varies based upon those factors. For us, we have non-recourse loans, so the foreclosure will be treated as a sale of the property...I've written a little more below about this.

Federal tax liability after foreclosure is also different on a case-by-case basis. What we found out was that The Federal Mortgage Relief Act does not apply to foreclosure of non-recourse loans. For federal taxes, foreclosure of a non-recourse loan does not trigger a cancellation of debt, but is treated as a sale for tax purposes.

For us, we have two purchase money, non-recourse loans - both of these will be treated as sales for tax purposes for both Federal and State.

Here is how we figured out our tax liability:

1. The amount of debt on the mortgages immediately prior to the foreclosure.
2. Adjusted basis in the property (purchase price plus any major improvements)
3. Subtract debt from adjusted basis - this is the tax liability for Federal and State.

Hope that helps!

Thanks for your advice. I'm trying to figure out your 3 guidelines. What it:

1. The amount of debt on the mortgages immediately prior to the foreclosure is 425,000 (loan is negam)

2. Adjusted basis in the property (purchase price plus any major improvements) is 410,000

3. Subtract debt from adjusted basis - this is the tax liability for Federal and State. The answer is -15,000.

Will you be tax if its negative? Thanks and More Power!

[azhardspot]

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

[outta_here]

Originally Posted by azhardspot

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

Hey there azhardspot - That is a general outline of the Mortgage Debt Relief Act.

However, for non-recourse loans taken in foreclosure, no cancellation of debt is created. The lender cannot come back after you for the amount owed on the loan, and the only way for the lender to satisfy the loan is to take back the title to the home. Since there is no other recourse for the lender to take, no true cancellation of debt is created. The foreclosure of non-recourse loans are treated as sales of the property for the amount of the mortgage immediately before the foreclosure.

Recourse debt is treated differently and creates a cancellation of debt, should the lender choose to cancel the debt and not come after you for it. And here is where things start to get tricky - if someone has non-recourse loans and works out a short sale with the bank or does a deed-in-lieu, both of these situations create recourse loans out of a non-recourse situations. Or, if you have a second on the house which is recourse and your first is non-recourse, cancellation of debt income is created by the second if you foreclose on the home.

This is why talking to either a tax law attorney or an accountant is important to find out the exact amount of cancellation of debt you may be reponsible for if you have loans which are recourse and/or decide to do a short sale/deed-in-lieu.

[outta_here]

Originally Posted by emc0317

Thanks for your advice. I'm trying to figure out your 3 guidelines. What it:

1. The amount of debt on the mortgages immediately prior to the foreclosure is 425,000 (loan is negam)

2. Adjusted basis in the property (purchase price plus any major improvements) is 410,000

3. Subtract debt from adjusted basis - this is the tax liability for Federal and State. The answer is -15,000.

Will you be tax if its negative? Thanks and More Power!

Hey emc0317 - If you are in California and your mortgage is purchase money only, then your loan should be considered non-recourse and this is the basic formula for finding out your tax liability. Since the amount is less than 0, then you would have no tax liability created from the foreclosure. This only applies to foreclosure and not short sales or deed-in-lieus.

I went back and read some of your previous posts here on the message board, and I am not completely sure if your loan is non-recourse because you have negative amortization - also, you have PMI which changes the situation because even if you manage to foreclose and satisfy that portion of the debt, some PMI companies have been suing borrowers. In your case, I would absolutely get your mortgage paperwork together and head to a real estate attorney who specializes in foreclosure to make sure you have all of your bases covered.

Best of luck to you!

[caldwellb02]

This is a wild thread in that it NEVER occurred to me that not only after all of this I would be losing my home, but that I might be taxed on the mortgage as forgiven debt.

I read and reread this thread and it looks like there may be a formula for CA, but really what about the Feds? My home is underwater for sure. Do they use the same formula?

[outta_here]

Originally Posted by caldwellb02

This is a wild thread in that it NEVER occurred to me that not only after all of this I would be losing my home, but that I might be taxed on the mortgage as forgiven debt.

I read and reread this thread and it looks like there may be a formula for CA, but really what about the Feds? My home is underwater for sure. Do they use the same formula?

Hey caldwellb02 - I went back through your threads but couldn't find your loan information clearly - If you are in California and your loans are non-recourse, then this formula is for both Federal and California taxes. What is your loan information and maybe I can help you with some advice on what your exacts are...granted, I am a layman on tax issues - but I have two years of accounting classes specializing in taxes under my belt and might be able to give some basic advice. Like I keep saying, it's important to talk with a tax attorney or CPA for everyone because all of our situations are so different and no one answer covers everyone.

I agree, it is crazy to think that after losing our homes we will get stuck with a tax bill - it's not like the bill we are all paying as Americans with our tax money for the bank bail out is huge enough, we get hit twice.

[emc0317]

Originally Posted by outta_here

Hey emc0317 - If you are in California and your mortgage is purchase money only, then your loan should be considered non-recourse and this is the basic formula for finding out your tax liability. Since the amount is less than 0, then you would have no tax liability created from the foreclosure. This only applies to foreclosure and not short sales or deed-in-lieus.

I went back and read some of your previous posts here on the message board, and I am not completely sure if your loan is non-recourse because you have negative amortization - also, you have PMI which changes the situation because even if you manage to foreclose and satisfy that portion of the debt, some PMI companies have been suing borrowers. In your case, I would absolutely get your mortgage paperwork together and head to a real estate attorney who specializes in foreclosure to make sure you have all of your bases covered.

Best of luck to you!

Outta here,

Thanks for the response. I'm in CA and I have PMI. I know about the purchase money in CA CC 580B/D, however I refinanced but never got cashback just to make 80/20 to 1 loan. This is the one that I'm gonna ask the legal expert in January until then I will follow your thread. Thanks and More Power!