Legal Question in Bankruptcy in California

1. We currently have over $85,000 in unsecured debt in credit cards due to home improvements on the home listed below.

2. We own one home that we owe $465,000 and zillow shows valued at $442,000. The payment is currently over $3500.00 per month and we only receive $2400.00 per month in rental payment to us. We owe $16,000 in back property taxes. We also pay for the house insurance.

3. We also one a home that has a first of $230,000 and a 2nd of $166,000 and zillow shows is valued at $230,000. The first is currently $1639.00 and the 2nd is an adjustable currently at $500.00 per month and we receive $1900.00 per month in rental payment to us. We owe about $1700.00 in back taxes and we also pay the house insurance.

We know we need to proceed with the Bankruptcy however we are being advised by 2 real estate agents to short sale the houses instead of including them in the bankruptcy. I am scared to death of the possible repercussions should we not be able to short sale these houses and the tax income ramifications if we are beside the length of time involved. We have been putting off the bk and house sales for 2 years hoping something will turn around and now we just want out as fast and easy and we can before the stress kills us.

Can you please offer some insight?


Asked on 9/16/11, 2:03 pm

3 Answers from Attorneys
Geoff Morris The Morris Law Group

Because you are planning on filing bankruptcy there is no point in short selling your homes. In fact the short sale of your rental property can lead to tax liabilities. You can just surrender the homes in your bankruptcy. In fact by filing bankruptcy most likely it will prolong the time you can stay in your home and collect rent on your second property. You can call me to discuss this further 949-80-1182.

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Answered on 9/16/11, 5:43 pm
Douglas A. Crowder Crowder Law Center

Generally, there are no tax consequences of filing a bankruptcy, however you should consult with a tax professional to be on the safe side. Since both the homes have a negative equity and a negative cash flow, there is no reason to keep them. Also, if you are doing a bankruptcy, there is no reason to do a short sale.

However, there is a possibility that if you do a Chapter 13, you can "strip" the 2nd lien, meaning to get rid of it. That might get you some equity in at least one of your houses -- or at least reduce the amount of negative equity.

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Answered on 9/19/11, 5:09 pm
Paul Staley Law office of Paul Staley

DO NOT short sell the properties. Though it isn't completely clear from your info, it's possible you NEED the mortgage obligations in order to satisfy the Means Test in bankruptcy if you're over the median income for your household size. You need to be talking to a competent bankruptcy attorney in your area ASAP. Don't let the homes go in foreclosure just yet, either. Same principal: you may NEED those mortgage obligations for deductions from income on your bankruptcy Means Test.

Two exceptions exist to the general rule that "forgiven debt" is taxable as income: (1) you're insolvent and (2) the debt is discharged in bankruptcy. You'd be off the hook for taxes in you file bankruptcy, at least as to INCOME taxes on the shortfall when these properties are auctioned.

You're way out of my geographical area (San Diego), so look closer to home for help.

Paul Staley www.bankruptcy-sandiego.com 877-261-2217

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Answered on 9/21/11, 9:25 am


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