Bankruptcy, Short Sale and/or Foreclosure

[KeysBooks]

Client filed BK in Jan 09. Cleint included a home in the BK and was discharged. Bank never foreclosed on the home 9 mos later. Client considering a short sale to reduce burden of care of the home. However, the Client's BK attorney is not sure what the tax consequence might be if client were to receive a 1099C (cancellation of debt) for a date 9 months to a year after the BK discharge.

Please advise if anyone researched recent rulings regarding this scenario as I'd like to be able to advise client.

Thank you.

[rfassett]

Interesting question, but I don't think it would fly. Client included home in a bankruptcy that was successfully discharged means that the client does not owe anything on the home. A short sale would be used to sell the property for less than what the seller owes on the mortgage. In your case, the "seller" does not owe anything on the mortgage. The bank, on the other hand, still has its full lien on the property even though the client's debt has been discharged. I see only two options for your client. 1.) Send the potential buyer to the bankruptcy division of the bank holding the mortgage and see if they can work something out between themselves. OR 2.) If he wants to reduce his burden of care, simply move out. The bank will be forced to foreclose sooner or later. If they don't, the tax authorities will, or the local municipality may very well start assessing penalties for lack of proper upkeep. And in either event, your client should be grateful for a rent free ride that has lasted at least nine months. Just some thoughts.

[KeysBooks]

Thanks for the input.

Just to clarify, the client hasn't been enjoying a free ride and living there for 9 months. The client hasn't paid anything on the mortgage for 1 1/2 years but also hasn't lived there either and immediately moved out 1 1/2 years ago with the intention of selling on a short sale that fell thru as the bank dragged feet and buyers renagged. It never sold. In the meantime due to several other factors, client filed BK and included it hoping the foreclosure would occur expeditiously. It hasn't and the client has kept up the home ( the a/c on to avoid mildew, done internal repairs, kept up the yard, etc.) The taxes and insurances have been added to the balance of the note with the bank and the bank has paid them. The municipalities, therefore, will not be forcing the issue.

but, the bottom line maybe that if the realtor were to find a buyer for the home on a short sale, then the realtor on behalf of the buyer would have to negotiate directly with the bank. The problem is, even if the bank were to agree to a short sale; since the client still technically owns the home; the bank could send a 1099c to the client.

[kcjenkins]

The client is no longer the owner, if it was given up in the bankruptcy, the bank is. Even if they have dragged their feet on making the title changes, they know they own the property, which is why they are paying the taxes. If he should get a 1099C at some later date, you can cancel it out using bankruptcy as the reason, in complete honesty. Regardless of the timing, that is what happened. Should the IRS have questions, you would just refer them to the Bankruptcy court case file number.

[KeysBooks]

KC:

I understand your reponse, but not sure what the appropriate action or recommendation to the client would be.

On one hand you are saying the client is not longer the owner, the bank is. Does this mean you recommend against putting home on market for a short sale?

but, on the other hand you are saying, if they get hit with a 1099 c; then regardless of the timing; the client isn't responsible for taxable income. So, are you advising here that they could go ahead with a short sale without a taxable consequence?

Thanks,

[rfassett]

KeysBooks - I apologize for my previous erroneous assumption. One would think that by this stage of my life, I would know better. Anyway, I think what KC is saying, and I am not trying to put words in her mouth, she can correct me if I am wrong, your client has nothing to sell. He has nothing to put on the market - at least as far as this house is concerned. If the bank for some reason would give him a 1099C, which is doubtful since most banks understand the bankrutcy rules and your client's ex-home is most likely being handled by the bank's bankrutcy department, he would simply use the bankruptcy reason to exclude the income. Your recommendation to your client should be along the lines of "just let it go". It ain't his problem anymore.

[KeysBooks]

Okay thanks for that clarification. Its true ! I can roll with that one. I think they are being pretty conscientious and not wanting to let it fall into disrepair to save the neighborhood/neighbors from dealing with it.

[kcjenkins]

KeysBooks - I apologize for my previous erroneous assumption. One would think that by this stage of my life, I would know better. Anyway, I think what KC is saying, and I am not trying to put words in her mouth, she can correct me if I am wrong, your client has nothing to sell. He has nothing to put on the market - at least as far as this house is concerned. If the bank for some reason would give him a 1099C, which is doubtful since most banks understand the bankrutcy rules and your client's ex-home is most likely being handled by the bank's bankrutcy department, he would simply use the bankruptcy reason to exclude the income. Your recommendation to your client should be along the lines of "just let it go". It ain't his problem anymore.

Yes, that is what I meant. He can not sell what he does not own, and he has no part in the sale, so he should just back off and leave it to the bank.