Here’s another idea about dealing with the threat of deficiency judgments and the income tax consequences of a deed in lieu or short sale. At a social gathering over the weekend I had a conversation with Larry Kosto, a well-known creditor collection attorney, about how debtors can avoid income tax liability when a bank forgives debt underlying a mortgage. Larry said some of his creditor clients who are amenable to taking a deed in lieu or a short sale have entered into a written stipulation with the borrower that the value of the property surrendered is equal to the amount of the underlying debt. In such event, the lender is agreeing that it is fully satisfied by taking back the property. There is no deficiency liability. If the lender does not pursue a personal judgment against the borrower the borrower has not benefitted from taxable forgiveness of debt.
If you negotiate with your mortgage lender about voluntary surrender of the property see if they will stipulate that there is no difference in the amount of debt and property value to avoid potential income tax liability from debt forgiveness.
Its very important for every individual to learn how debtors can avoid income tax liability when a bank forgives debt underlying a mortgage.
Just like you other article. This article is also full of informative.
Is it true that before you ask the lender for a short sale or a deed in lieu you have ta fall behind on your mortgage payments?
Confused!?!
My husband was just discharged from Chapter 7 Bankruptcy a couple of months before we were married. He agreed to include the surrender of his property in the bankruptcy filing because he owed significantly more than the actual value of the house and mortgage was unbearable. Now I understand that the lieu on the property is not automatically transferred to the lender when bankruptcy is filed/discharged. So in effect, the lender must continue with the foreclosure proceedings to regain possession of the lieu on the property. The property is now vacant and we have notified the lender that they may to go ahead and take the property. The lender, however, is telling us that we must complete a deed-in-lieu to surrender the property. Should we do this or is it better to allow the foreclosure proceedings to continue to completion? Either way, does the filing of the Chapter 7 Bankruptcy prevent the report of a foreclosure on my husband’s credit report? Additionally, the bank has filed a civil suit against my husband for attorney fees, costs, and re-establishment of lost note. What does this mean? Will this hurt him?
Thank you in advance for any information you may have to offer.
I am currently seeking a deed in lieu of foreclosure from my lender, and have been told that they have approved a deed in lieu, and that the paperwork (presumably with the proposed terms for the deal) will be in the mail within a few days.
Assuming this is true, my next concerns are with the tax consequences due to the forgiveness of debt. And related to this, I’m concerned that the actual AMOUNT of the forgiveness of debt is fairly open-ended right now, and that I could be surprised with a larger number next year than I initially expected… So, how and when should I know — in writing — what the forgiveness of debt will actually be? Should this be covered in the paperwork for the deed in lieu?
But what happens with all the loans that was taken out of that home? A HELOC or equity loan? This still would represent a profit according to IRS?