Los Angeles Bankruptcy Law Monitor : Los Angeles Bankruptcy Lawyer & Attorney : Christine Wilton Law Firm : Southern California Chapter 13 & Chapter 7 Bankruptcy, Foreclosure

One of my favorite activities as a leader in my own law firm is to take time and answer questions over at LawQA.  These questions come to me in an email and I respond with short answers most of the time.  This one though, caught my attention because just yesterday my partner John Greifendorff and I sat down with a couple of real estate professionals and discussed the benefits of a short sale after bankruptcy. 

I'll have to admit that in a prior article, Don't Get Stung in a Short Sale, I was of the opinion that a short sale would not serve a consumer at all. There are still warning signs to look out for, but I can now see that a short sale may not only benefit the consumer who eventually wants to buy another home later, it may also help our economy recover faster.

So the question in the title of this article asks which direction should the homeowner take after their bankruptcy case.  Generally, I would answer that it doesn't matter because your legal obligation to pay your debts has already been discharged and you would incur no tax consequences from any of the choices above. However, I will now add that if you want to buy a home again and re-enter the real estate market, you want to consider your options more closely.

I suggest you take some positive steps this way:

• Continue to maintain your home within reason and only using your own "sweat equity" by keeping the grounds and not otherwise destroying the property before you leave;

• Work with qualified, established negotiators to guide you through this short sale process. It is an added bonus, if they work closely with a law firm to review your short sale papers so that the transaction will leave you with no surprises after the close of the sale;

• Ask for "Cash for Keys" or some other incentive to leave at the end and show your good faith by leaving the house in a well cared for condition .

I can now see that a short sale after bankruptcy can be beneficial to the consumer by shortening the time for them to re-enter the real estate market. We know the benefits to the lender are the savings to them because foreclosure is a costly process; and the economic recovery process occurs more quickly when we can help families become homeowners again sooner. Besides who else is going to buy all this real estate that the banks are holding? If you need a referral to a trusted short sale professional, give me a call; I'll be glad to help.

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American homeowners are still in trouble with mounting mortgage defaults and depressed property values. The lenders and loan servicing companies are non-responsive to their customers and HAMP has had an embarrassing 20% success rate, which leaves homeowners high and dry when it comes to help with their mortgages and distressed properties. Getting out from under your upside down property through a short sale starts to look pretty good in comparison to either a foreclosure or bankruptcy on your credit report; right?

Back on April, Carry Bay highlighted the dark side of short sales in her article, Short Sales…A Breeding Ground for Fraud? Since short sales are gaining in popularity and I continue to respond to questions from my clients about their options; it’s important to be on the lookout for fraud. 

Speaking of fraud, the next time you’re approached with an offer to short sell your property consider this: The only people that are benefiting from the short sale of your home are the mortgage companies and the real estate broker who gets a commission from the sale. In addition, you would be left holding the bag, long after the deal is done, if the transaction is not conducted properly. 

This article, A Short Sale May Not Mean You’re Home Free, warns of the problems that crop up long after you move out. Not only could you be liable for deficiencies, especially if you held a second mortgage or home equity line of credit on the house, but your credit score may be in worse shape, if the information is reported incorrectly.  Don’t just let your Dream of homeownership slip away without knowing your options and your rights.

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The only reason you should negotiate directly with your creditors, is to avoid bankruptcy.  Remember that working with debt settlement companies is both costly and detrimental to your finances and will likely land you in my office filing for bankruptcy.  If you want to avoid bankruptcy, work directly with your creditors for an agreement on what your debt is worth.  If they even think you're about to file for bankruptcy, they will most likely make some kind of offer.  However, settling debts to avoid bankruptcy comes with a price;  Income Taxes!

Beware that if you settle, or negotiate a debt to avoid bankruptcy, you could end up getting a tax bill.  while the IRS is forgiving settled debt where mortgages are concerned; the California Franchise Tax Board is not because their program has expired.  So, in California, you'll wind up owing state income taxes, if the debt you settled relates to a secured mortgage in a short sale.

But what about your credit cards?  Unsecured debt negotiations and settlements will be taxed by both the state and federal agencies.  So, unless you're prepared to pay taxes on the amount that will be written off by your creditor, then, like Cathy Moran said in her blog, Should I Settle Some Debts Before Bankruptcy, your money could be put to better use, like saving for retirement.

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