June 9, 2011

Falling Home Prices & Bankruptcy

Posted in Bankruptcy, Forclosure tagged , at 12:52 pm by demetriagraves

Recently new numbers on home values around the country were released that confirmed a “double dip” in housing prices, falling below the 2009 low. This is frustrating news for many people that have been holding on to their home, making their house payment month after month, but are continuing to see the value of their home plummet. Many of the people I meet with in bankruptcy consultations are upside down in their home, some owing hundreds of thousands of dollars more than their home is worth.
The falling house prices have led many to the decision that it simply is not a good financial strategy to stay in their home. There is a lot of emotion tied up into our homes; it is where we raise our families and where memories are made, but if you set aside the emotional part of it, it may not make a lot of sense to stay in a home that is severely upside down in this market.
The question most people are concerned about is if they do decide to walk away from their home what possible liability will they have from the bank? The answer depends on what type of loans you have on the property. If you only have a first mortgage and decide to walk away from the home you will not owe anything additional on that property. When you bought the home the deal was you pay the mortgage and you keep the house; if you don’t pay the mortgage the bank gets the house.
The area where most people run into problems is when they have a second mortgage or a home equity line of credit (HELOC). If you refinanced your home and took out a second mortgage or HELOC and used the cash for something other than purchasing your home you will be held liable for any balance owed after the bank auctions off your house.
Bankruptcy can help. You can surrender your home through a chapter 7 bankruptcy and any potential balance owed will be discharged/eliminated through the bankruptcy process. Once your bankruptcy case is filed it typically takes anywhere from one month to five months for the bank to get permission from the bankruptcy court to move forward with the auction of your house.
Another issue that people deal with when it comes to short sales and foreclosures is the possible tax consequences. Banks can issue a 1099 for any debt that is forgiven. For instance, let’s say the bank forgave $100,000, you could receive a 1099 for $100,000 which you would be taxed on as if you actually earned an additional $100,000 of income that particular year.
By surrendering your home through bankruptcy you would not incur any tax liability. If you are weighing your options on whether to keep your home or walk away, I offer a free 30 minute telephone bankruptcy consultation where we can discuss your situation and how bankruptcy can help.
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