Short Sale & Bankruptcy...how do they work together?

[ctousley819]

Hello everyone, I hope someone here may be able to help me out or point me in the right direction. In June of 2010, we had to close our business and unfortunately file for bankrupcty (we lived in NY at the time). Our mortgage, which at the time was with BoA, was included in the list of creditors. The payoff balance was approx $245k. In talking with our bankrupcty attorney, he said if we sold the house (it was valued at approx $300k), that we should fall within the range for the homestead exemption allowing us to keep the proceeds. So the house was listed in July of 2010. At that time, we moved from New York to Virginia, as we accepted positions there so it required a move out of state.

We had the meeting of creditors, and then ultimately the bankruptcy was discharged in March of 2011. The house had not sold to that point, it was still on the market with us reducing the price trying to get it to move. During the process, our attorney was pretty much non existent once the discharge happened, because we needed to know what happens with the house, since BoA was listed as a creditor. However, many calls and e-mails to him were not returned. So the house stayed on the market, we had not made any payments on the house since June of 2010, and BoA had not acknowledged any discharge or foreclosure activities. In July of 2011, we finally got an offer but it would result in a short sale.

We agreed and started the process, and last week we were finally told that it had been approved. But now we have questions that neither our real estate attorney, nor the IRS seem to be able to answer definitively for me. In the approval letter, BoA says that the difference between the prinicpal owed and the amound agreed upon (approx $8k) would be on a 1099C, and reported as taxable income. Well obviously, being taxed on that is while understandable from a legal standpoint after understanding it, is not something we can afford. However, research showed me that the IRS passed the Mortgage Forgiveness Relief Act which could allow this to be exempt for a few different reasons. The first reason would be primary residence, but unfortunately it was not. Another exemption that would qualify is bankruptcy, which is obviously something we did have to go through and as mentioned before, BoA was listed.

I spoke with the IRS, and what I got from that was that if it was either non-recourse, or discharged in Bankruptcy that they would not look at it at all, which is what we want. But if I understand right also, NY is a one action state.

So, after all of that...my question is, does anyone have experience in this type of situation which would hopefully tell me that yet, the amount that BoA forgives is exempt and will not be considered taxable income? Then in my talkes with NYS, they said they would classify and deal with it exactly as the IRS would.

I hope any and all of that made sense, if not I will gladly try and clarify if it will help.

Thanks

Chaz

[hillaryg]

im bumping this for you... im curious too. we discharged our house in our bk in 2010 and the house has yet to be taken. we FINALLY got a NOD filed on it april 6 and just listed it for SS yesterday and am curious too. But I was told by my attorney that because the house was put in the bk that we are not responsible for the debt associated with the house anymore. a SS is no benefit to us at this point except we're trying to get some money out in the end to move.
What ended up happening to your house?

[ctousley819]

im bumping this for you... im curious too. we discharged our house in our bk in 2010 and the house has yet to be taken. we FINALLY got a NOD filed on it april 6 and just listed it for SS yesterday and am curious too. But I was told by my attorney that because the house was put in the bk that we are not responsible for the debt associated with the house anymore. a SS is no benefit to us at this point except we're trying to get some money out in the end to move.
What ended up happening to your house?

Well, it finally sold. Everything I read, and after talking with some tax people and attorneys, like you since it was included in the bk that we would not be responsible for the difference from the SS. The house did not officially close until this year in March, so any tax blow would not be until next year. But again, since the house was included in the BK, that we would not be taxed on the amount either, so we should be in the clear.

When we filed, our attorney did not think it would have taken this long to sell (of course, he is not a realtor, so I should not have listened to him on that one). In hind sight, we should have just turned it over during the BK, it would have saved us A LOT of headaches and sleepless nights. The SS was no benefit at all. Even more so, our real estate attorney said the buyers were interested in taking possession early, and paying rent to us. He said in that instance we could actually make a little money (I believed what he said, he is the attorney, not me). Well that was pretty much the only reason we agreed to do the SS, or we would have turned the house over then. However, the buyers never took possession early (which turned out to be good, as I have read many horror stories about that).

I wish you the best of luck and hope the SS happens quickly for you. Who is the primary bank for your mortgage?

[hillaryg]

Wow that's nuts. Ya we are just doing the SS to try and get some money in the end but we'll see. We have BofA for the 1st and chase for the 2nd... they both got put into the BK so there's no point in us doing this but whatever. Yes you are all clear of the taxes and whatnot because of the bk.
We have 5 offers on the house and it's been up for like 3 days. Oh well

Well, it finally sold. Everything I read, and after talking with some tax people and attorneys, like you since it was included in the bk that we would not be responsible for the difference from the SS. The house did not officially close until this year in March, so any tax blow would not be until next year. But again, since the house was included in the BK, that we would not be taxed on the amount either, so we should be in the clear.

When we filed, our attorney did not think it would have taken this long to sell (of course, he is not a realtor, so I should not have listened to him on that one). In hind sight, we should have just turned it over during the BK, it would have saved us A LOT of headaches and sleepless nights. The SS was no benefit at all. Even more so, our real estate attorney said the buyers were interested in taking possession early, and paying rent to us. He said in that instance we could actually make a little money (I believed what he said, he is the attorney, not me). Well that was pretty much the only reason we agreed to do the SS, or we would have turned the house over then. However, the buyers never took possession early (which turned out to be good, as I have read many horror stories about that).

I wish you the best of luck and hope the SS happens quickly for you. Who is the primary bank for your mortgage?