Legal Question in Bankruptcy in California

I'm writing for my baby boomer parents who want to retire. My dad gets Federal retirement and my mom is just about to get her retirement for being a part-time Community College professor for 32 years. They have been eligible for Social Security benefits for a few years. Now for the debt. They will close a "short sale" on the home I grew up in within two weeks. They will get a 1099C for $220k of forgiven debt. After careful analysis of their tax liability for such cancelled debt, they may have some tax liability if they do not file Bankruptcy. They have about $100k in credit card debt and their FICO score is so low, that paying off these credit cards seems pointless to me. They drive old cars with high mileage. Six months ago, they pulled out all of their invested retirement money and bought a really cheap manufactured home in a retirement community that they own without any mortgages, liens, etc. valued at about $60k. They both work part-time right now and want to quit and fully retire ASAP. Should they file Chapter 13? Should they attempt to settle their debt for less? Should they stop paying their credit cards and risk a judgment against them? We need to hire an expert for advice and/or representation in this complicated matter.


Asked on 6/15/12, 1:46 am

4 Answers from Attorneys
Tony Carballo Carballo Law Offices

Most likely they just need relief under Chapter 7 to discharge credit card debt. There should be no tax liability for short selling their home.

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Answered on 6/15/12, 8:55 am
Charles Andersen Charles Andersen, Atty

I'm writing for my baby boomer parents The income tax liability arises for debt foregiveness under the tax code. Debt discharged in bankruptcy is not foregiven debt and can't be taxed. However, the tax liability for the short sale of the house cannot be discharged in the bankruptcy as it occurs within three years prior to the filing.

To avoid the tax liability they need to file the bankruptcy prior to the short sale. "File on the mortgages"

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Answered on 6/15/12, 9:40 am
Robert F. Cohen Law Office of Robert F. Cohen

Mr. Andersen took the words out of my mouth. They should speak with a local bankruptcy attorney immediately -- before the short sale occurs -- to find ways to avoid the tax consequence of the short sale.

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Answered on 6/17/12, 5:00 pm


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