QUESTION: DEAR Ken, with this debt relief act expiring year end what will happen after, will the lenders pursue a civil judgment on foreclosed or short sales of properties?
Ken Go: The Mortgage Debt Relief Act is not common knowledge. Potentially millions of people will find themselves stuck with a huge tax bill after foreclosure if the government doesn’t renew the Debt Relief Act at the end of 2012 or if they don’t finalize their foreclosure by that date. The bill may well expire, like when Congress chose not to renew the home buyers tax credit. The Mortgage Debt Relief Act was created to protect homeowners who are foreclosing on principal residences only and who have never refinanced by taking out a home equity line of credit. The Internal Revenue Service states that The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. Check with your CPA and ask them about filling a 982 form with your debt cancelation notice.
Today, mostly all the short sales approval carries a lien release and a debt forgiveness clause which assures the homeowners that once the short sale is processed the borrowers will no longer be liable for the debt and with the “Debt Relief Act” still in place can write off the taxes they would have had to file due to the forgiveness of debt.
Remember, if you had a Short Sale completed in the previous year please do not forget to file the 1099C you would have gotten from your previous lender. That might seem like a earned income for the debt forgiven by your lender thru the short sale process, IRS still would like that to be properly declared. Please check with your CPA about that. I have gotten calls for IRS calling on 1099C’s not filled properly.
Q&A: Dear Mr. Go I am going to file for BK and would like to know if that will STOP the foreclosure process permanently?
Ken Go: Thanks for the inquiry, I would like again to disclose that I am not an attorney. I am only giving my own opinions and comments. I researched on this site: loanworkout.org and here are the info: “ Many homeowners will file for Chapter 13 specifically to stop their sale date. Only to find out later, that their mortgage is not included and now they may have both on their credit reports. In most cases, when you file BK, an automatic stay is granted prohibiting your creditors from attempting to collect or contact you.
However, the automatic stay and the stopping of the foreclosure is ONLY temporary.
More often than not, a creditor such as your lender can get around the automatic stay by asking the courts to remove (“lift”) the stay because it is not legally binded to the proceedings.
In many cases a homeowner will shell out $2,000-$3,000 to file an emergency BK the day before their property is to be sold at the notice of trustee sale. Often there is no equity in the home and there is no way for the borrower to come up with the full amount owed to their lender and in some cases, the homeowner is jobless.
This is a really common scenario. The banks know this and their lawyers understand this like the backs of their hands. And like clock work, shortly after you file for bankruptcy, the lender will ask for permission to proceed with the foreclosure and quite often (since it is the law), the foreclosure proceeds.
Now the person is stuck with two HUGE black marks on their credit and the are probably mentally depressed?”
Loan stripping of second mortgages is commonly misunderstood. Homeowners filling for bankruptcy somehow thinks that the second loan (if they have it) will drop off after filling. I have gotten many calls and have simultaneously check with title if the second lien has been removed. But unfortunately this is not a very common occurrence, your second lien might not be collecting anymore but rest assure its still tied to your property and is considered a lien. Please clarify with your attorney how a lien may or may not be removed after filling for BK.
Q&A: Myth: Lenders and servicers are offering principle reductions on borrowers whose mortgage balances are in the red and owe more than the home is worth.
Fact: Yes, but this is very rare.
This is usually done when a borrower has a 1st and 2nd mortgage and the 2nd is negotiated down and settled for 10-20 cents on the dollar. The first is less likely to offer a reduction in principle unless they are facing litigation and or there are legal violations on the borrower’s loan.
There are many scammers that claim they can do this on a regular basis. Don’t buy into their hype or snake oil because that is all it is.
Think about it. If lenders started writing down mortgage balances to borrowers on a regular basis, then everyone and their mother, brother and sister would know about it and demand the same treatment. They will all be standing in line to have their loan balances whacked in half.
Do you know what that would do to our banking system and the foreclosure crisis? It would crush the remaining banks and the write downs would be gargantuan. The impending flood of litigation initiated by burned investors would engulf Wall Street and drown all the banks in a tsunami second.
I am sure millions of homeowners would just walk from their homes if they didn’t get their principle reduced like the Joneses next door. It’s the old adage, “If you did it for them, then why can’t you do it for me?” Now multiply that by millions and millions of people and you can see why this will not happen anytime soon.
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Thanks for your inquiries and please call me anytime, Ken Go of 1st Innovative Finance Group at 562-508-7048 or write to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
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