The one thing that amazes me through all that is gone on over the last five years is how loosely people have become with filing bankruptcy.
Don’t get me wrong, bankruptcy serves a real purpose and is meant to discharge the debt that a potential debtor would otherwise never be able to pay off. As I cover this topic, please do not think I approach this from a moral perspective or with the passing of any judgment concerning anyone that files bankruptcy. My point is simply this, the filing of bankruptcy is a serious event that should only be done under the greatest of consideration. What bothers me is how quickly attorneys are to put their client into bankruptcy and how receptive clients seem with the concept of filing bankruptcy. I think most clients would make other considerations if properly consulted.
When I think of these events, I think of them from a strategic point of view. What effect will the bankruptcy have on me and my family looking out over the short and long-term? Don’t get me wrong, if I felt filing for bankruptcy would discharge debt that would be impossible to pay, I would file bankruptcy in a New York minute.
For me personally, I would only file bankruptcy if I had no other option. I would not file bankruptcy strictly out of fear that the bank may come after me one day for the deficiency achieved during a short sale or foreclosure. You must remember, for the rest of your life when asked on an application have you ever filed bankruptcy, the answer must be yes. To answer no is to basically commit a criminal event.
Again, for me personally, if I prosecuted a short sale or had a foreclosure, I would wait until the creditor literally came knocking on my door in an attempt to collect the deficiency. Keeping in mind that obtaining a judgment and prosecuting to collect on a deficiency is a judicial procedure (in Florida) that needs to occur. The filing of bankruptcy, many times can be achieved in a very short period of time, allowing you to maneuver as needed through the process.
With a short sale or a foreclosure, of course, we never quite know how the lender will handle the deficiency. Many times the lender does not go after the clients in an attempt to collect the deficiency. Many times the lender will file a 1099 C, which gets treated as ordinary income to mortgagee for the short sale or foreclosure. As of the date of this writing, a prior law passed in 2007 which forgives this income for people residing in a primary residence for two out of the last five years. These folks are not subject to the income tax liability on the 1099 they receive from the lender. This law is formally called the debt relief act of 2007, signed into law by President Bush.
In no way do I wish to tender legal or accounting advice. I highly recommend that you speak with your accountant, tax adviser or a licensed Attorney to better understand what your liability actually is. When speaking to your accountant, ask about the IRS code that allows for the avoidance of income tax derived from a 1099 if you are technically insolvent at the time that the incident happened. The IRS considers you insolvent if you owe one dollar more in liabilities then what you have in assets. The calculation adds up every thing you owe including the home or real estate property in question and treats that as liabilities, it then adds up all of your assets, thus forming a balance sheet. Again, if you owe one dollar more in liabilities than that in which you have in assets you may not be subject to personal income tax on the cancellation of the debts from a short sale or foreclosure. With any luck Congress will extend the current law concerning the 2007 debt relief act which will help relieve much pain on many of the constituents here in Florida.
Just remember, bankruptcy can be filed at anytime, many times in a very expeditious fashion. In certain cases bankruptcy can discharge a tax liability that was derived from receiving a 1099 on a foreclosure or short sale if needed. I very much recommend you speak to a licensed accountant to better understand your individual situation prior to contemplating bankruptcy.
Have more questions?
Call Alan today
Alan Palange is a Licensed Florida Real Estate Broker with over twenty five years experience in Real Estate Investing. Alan is also the Executive Director of Consumer Lawyers of America, PA located in Florida. Alan also worked as a licensed Florida Building Contractor building many homes from Palm Beach to Palm Bay.
When you hire Alan you get an enormous amount of experience and wisdom on your side. Alan has assisted hundreds of clients throughout Florida get out of a bad situation. There is never a fee for processing a Short Sale. In most cases Alan is able to get relocation funds for his clients upon the successful completion of the Short Sale. Alan is one of the best at what he does. It’s worth calling and speaking with him today for a free telephone consultation.