Short sales, Foreclosures, income tax issues regarding the same

Friends

Generally speaking anytime there is a cancellation of debt it is viewed by the IRS as a taxable income event and most lenders will issue the 1099. Even sometimes in bankruptcy proceedings when it is definitely not correct. I had a client walk in with one from Chase the other day and Chase darn well knows how this works...sometimes I think that creditors do it just to be jerks. At any rate...an exception these days is short sales on primary residences....that has been the rule for some time now and was recently extended until I don't know when. I'm always a little leery of the application of that exception....I have lots of clients that are pressured by realtors to do the short sales and my take on it is if a person is going to file a bankruptcy regardless then just surrender the property. There are just too many little twists, turns and exceptions in the tax code and if for any reason the exception wouldn't apply to a short sale and that sale was done prior to the bankruptcy filing then it is a priority income tax debt that is not going to be dischargeable for at least 3 years.

Back to the topic (almost...as you all aware I take a bankruptcy practitioner's slant on everything). Relative to foreclosures specifically and whether they will pursue a deficiency on a mortgage will depend on two things. The lender and how they want to proceed and also the law in the jurisdiction where the real estate is located as foreclosure is a creature of state law. In Minnesota a lender can foreclose by one of two methods. By "action" where a formal lawsuit is commenced by service of summons and complaint. Regular lawsuit and they will attempt to get an order of judgment for the deficiency to collect from the debtor. The other is by "publication" which is far and away the most common foreclosure method in this state. It is generally cheaper and is a faster for the lender to foreclosure. There are probably a half a dozen law firms in Minnesota that handle 95% of the home foreclosures...busy boys they are these days! If that method is used a deficiency is not allowed for the foreclosing lender...they get their security back and that is the extent of their recovery. Usually the chances of recovering from a homeowner if they are losing their home is quite small. Most properties these days though has second and sometimes third and fourth mortgages on them. They aren't going to step in and satisfy the first senior lender typically as the equity is just not there. Those junior lien holders will sue on the promissory notes signed by the debtors/homeowners that established the personal liability for those transactions as that is not wiped out by the foreclosure of the senior lien holders. We do a lot of bankruptcy cases to discharge that liability for those folks.



David D. Kingsbury
Attorney at Law-Bankruptcy Lawyer
Kingsbury Law Office
14827 Energy Way
Apple Valley, MN 55124
Tel. (952) 432-4388
Fax. (952) 432-4969
www.kingsburylawoffice.com