Usually when someone talks to a bankruptcy attorney, they will be advised to file bankruptcy; however this might not be the best option when other alternatives are available. Many homeowners facing foreclosure are under so much stress, they are usually looking for a quick way out; however Bankruptcy may not be their best option. Why? Because bankruptcy is not just a legal matter, it is a financial matter that should also be discussed with a qualified CPA. Many times homeowners file bankruptcy without exploring all the other possible options to bankruptcy that could have a better outcome to their overall financial recovery.
What are some of the reasons people file bankruptcy when facing foreclosure, and what are some possible solutions?
A Pending Deficiency Judgment - In facing a pending foreclosure, many homeowners are concerned about a deficiency judgment. However, a pending deficiency judgment could be eliminated as a condition for completing a Short Sale. If a deficiency Judgment cannot be eliminated in Short Sale negotiations, then a homeowner knows at that point what options are available to them by their lender.
Tax Concerns of a pending foreclosure - In a foreclosure or Short Sale, a homeowner may have to pay income tax on their lenders reported loss on the property (on IRS tax Form 1099-C Cancellation of Debt), otherwise known as "Phantom Income". However there are possible solutions to "Phantom Income" that should be discussed with a qualified CPA. These possible solutions are as follows:
•· Mortgage Forgiveness Debt Relief Act of 2007
•· Insolvency - IRS Tax Form 982 (Publication 4681)
•· Tax Write offs from the sale of a property
The homeowner no longer wants to own the property facing foreclosure - One of the biggest misconceptions that homeowners have about bankruptcy is that filing bankruptcy will relieve them of all the expenses and liability of a property they include in a bankruptcy.
Often because the debt on the homeowner's property is higher than what the property is worth, the trustee in a bankruptcy will abandon the property. Once the trustee abandons the asset, ownership and control of the real estate defaults back to the original title holder (subject to the property going into foreclosure). This means the homeowner is still legally liable for certain expenses associated with the property, even though they included the property in their bankruptcy.
Any debts that the debtor incurs after the bankruptcy petition filing date are considered post-petition debts that are not dischargeable in the previously filed bankruptcy. In this case, a Short Sale is still an option to transfer ownership to a new buyer and limit a homeowner's potential expenses and liability.
In closing, everyone's situation is different and it is important to seek qualified advice from a CPA in addition to talking to a bankruptcy attorney before a homeowner files for bankruptcy. In addition, Short Sale Brokers can also provide valuable information (free of charge) in discussing the benefits of a Short Sale. For more information on Short Sales, visit: www.SarasotaShortSaleBlog.com
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