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Decide: Short sale or foreclosure?

It’s The Law

Posted: August 15, 2008 8:07 p.m.
Updated: October 16, 2008 5:01 a.m.
 

In today's housing market, many people are upside-down with their mortgages. Not to mention, many homeowners have an adjustable rate mortgage that has the payment skyrocketing.

As a result, there are people who approach me with this basic of questions: Should I do a short sale or let the house go in foreclosure?

The question is not easy to answer. In a short sale (also sometimes called a quick sale), you are agreeing to sell your house back to the bank at a reduced price. Now, banks are not crazy about owning homes; they're in the making-money-from-interest-and-loans business.

They don't want to own homes. Especially if your entire neighborhood is faltering. Will they own your entire block? What about half your block? Is this really what Bank of America, Countrywide, HomEq and Chase Mortgage are in business for?

In addition, with a short sale, you may have to pay taxes on the amount you were forgiven, the write-off.

Talk to your CPA or enrolled agent about the tax consequences of this. A 1099c for the cancelation of debt might be sent to you, and then you have to pay taxes (not to mention property taxes). Check with your tax advisor.

A foreclosure, on the other hand, is where the bank takes possession of the house again. In some ways, it's like a car repossession. However, unlike a car repo, there are many statutory requirements about notice and such that the mortgage servicer has to abide by which are beyond the scope of this article.

The thing to get out of a foreclosure is that, unlike a quick sale, you won't owe additional income taxes if a foreclosure happens on your residence, thanks to the Mortgage Forgiveness Act that President Bush signed into law last year.

Also unlike a short sale, there is no aggressive and extremely hungry real estate agent seeking a commission off your transaction. Are they looking out for you?

Summary
Short sale: Realtor gets commission, possible tax bill to IRS, no leftover debt, roller-coaster ride.

Foreclosure: No Realtor, no tax assessment or 1099, credit hit, possible collection for unpaid mortgage.

And it's this last point where a bankruptcy could swoop in, remove any lingering debt owed to a mortgage company that didn't have their lien paid, eliminate the other debt you have, and get you a fresh start, tying this all up in a neat little bow.

Something to remember: Without additional action, you cannot sell or transfer your property in a bankruptcy!

So, there are no easy answers, both a bankruptcy and short sale are imperfect solutions. As of today, no bankruptcy attorney or judge can change your mortgage payment or balance or payout.

It is what it is.

However, if you want a fresh start, no property tax debt, no Internal Revenue Service bill, and just to move on, a bankruptcy before, during or after a foreclosure might be the way to go.

Hale Antico is an attorney who specializes in consumer debt. His column represents his own views, and not necessarily those of The Signal. "It's The Law" appears Fridays and rotates between members of the Santa Clarita Valley Bar Association.

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