Now I've heard it all-"Pain Free Short Sale"

iVillage Member
Registered: 09-24-2007
Now I've heard it all-"Pain Free Short Sale"
12
Thu, 08-25-2011 - 8:32am
So, my Husband and I filed Ch. 7 last June and it was discharged in 8/2010. We paid the mortgage all throughout the process and intended to stay and try and sell the place this summer. Cut to 12/2010 and things changed, safety issues, security, bad element in neighborhood- things of that nature. We stopped paying the mortgages (1st and 2nd with same bank). We moved in June to a rental in a better area, and things are great here! However, we have this house in our names. We were sent the Act 91 in June, the day before we moved.

I called the bank on Monday of this week to see where things were with the foreclosure and he said "well it's still internal here so it's pretty much nowhere" Then he says "why don't you sell it?" I say that I can't, the house isn't worth much now. Then he says, "we can send out an appraiser and you can get a realtor and we can come up with a price that will sell it fast." I asked him if that is indeed a short sale and he says he prefers to call it a Fire Sale. He said, it's good for you because once that foreclosure hits your credit report you won't be able to buy a new house for a few years. I said that I thought it wouldn't hit our credit because of the BK7 and he said, Oh, no it does go on there. I got scared, and he said "wouldn't you like to get this house off of your hands and move on?" "It could take years for us to foreclose". Basically he is saying that they price it low and because of the BK7 we can do this "Fire Sale" or "Pain Free Short Sale" easily and since they are pricing it right, it'll move fast.

THEN- today he drops the bomb. I asked him if we would owe anything at settlement and he said no- but you will get something I like to call a Phantom Income Tax slip and you'd have to pay income taxes on the amount that wasn't paid (difference between the balance on their books and what it sells for). As If I have thousands just laying around waiting to pay for this.

So I ask all of you- This is me getting the crap end of a deal right? He was acting like he knew nothing of how the tax works and I'd have to chat with a tax professional or accountant. Ok- I totally believe that one! This isn't his first rodeo, of that I am sure. I got excited to be able to be rid of this house quickly and to be able to buy again when we are ready and not in 5 years. I don't know what to think now.
Any help or words of wisdom are greatly appreciated!



Desiree

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Community Leader
Registered: 07-26-1999
Desiree, you paid through the BK, but did you sign a reaffirmation agreement on the house at all? I would check with your BK attorney on this one, he would have a record of it if you did. If you did not sign a reaffirmation agreement, technically under the BK laws, you included the house in the BK and can walk away from the house right now free and clear, and the bank will have to deal with it. If in fact there was no reaffirmation agreement, and the bank takes it over, or it even gets sold in a short sale, you will not, or are not legally supposed to get a tax slip (or what they call a 1099) because the debt was technically part of the BK and therefore, they can't tax you on it. It never hurts to put it up for sale and see what you can do to get rid of it, but honestly, I don't know what obligation you have to do it, the bank will need to approve the sale of the house regardless becuase it holds the mortgage to it, and I haven't ever heard of a pain free short sale. However, in this case, because it shouldn't have any ramifications on you legally, it may actually be less than painful. ;0) Also, as to the credit report, if the house was included in the BK, and you ultimately let the bank take it over, it should be tagged as "Included in BK", it should not be tagged as foreclosed.

The best thing for you to do is meet with you BK attorney again and get clarification on how the house was treated in the BK and if you signed a reaffirmation agreement. If you did, you'll need more legal advice from your attorney...
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iVillage Member
Registered: 09-24-2007

Thanks Arryl for getting back to me!

Desiree
Community Leader
Registered: 07-26-1999
I'm actually surprised the guy at the bank would talk to you ,much, usually they have a specific BK department, but maybe since the bankruptcy has been discharged they have mainstreamed it again. You will want to search out a realtor familiar with th short sale process also. And as for the foreclosure on your credit report, once everything is finished, you'll want to get a copy of your credit report, see how the house is listed and then dispute it if it shows a foreclosure. I know there are a few other threads on the board that have info on the process you can look up. I can't pull up links right now while I'm on my iPad, but I'll look later for you.
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iVillage Member
Registered: 04-01-2003
Hi;

Actually, if the house is included in your BK 7 and it foreclosed on you aren't liable for anything but the house will be showing on your credit report as a foreclosure even if it is included in the BK. I did the same thing, filed CH7 included the house, the bank has to foreclose in order to take possession of the house legally. You can buy another house but you would have to wait 3 years from the foreclosure/date that the bank takes possession and you would have to go FHA. Conventional is 5 years at least with 20% down. I have done all the research on this and talked to loan officers and others. Let me know if you have any questions. I would be happy to help.

Heather
Heather

 

 

 

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iVillage Member
Registered: 09-24-2007

Thanks, Heather for the info! So- may I ask you- how long did it take for your bank to finally foreclose and put it in their name? I was told by the guy at the bank that it would take up to 2 years for it to finally happen. That means that we will most likely have to wait approximately 5 years to buy again if we do FHA. That's a long time!

Desiree
Community Leader
Registered: 07-26-1999
I think its going to depend on the bank. It used to be an average of 2 years, but with the economy the way it is and so many other homes going into foreclosure, depending on if its a big national bank or a smaller local bank, it could be 6-12 months or it could be 2 years. If you are intent on letting it go back to the bank, your best thing is to stop paying on the mortgage, pile up the cash and get an apartment. But during that time, put it on the market with a reputable, good real estate person and see what you can do to get it sold, even if it ends up being a short sale. At least you can say that you tried your best to get rid of it for them.
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iVillage Member
Registered: 04-01-2003
Well we filed in 03/10 and moved to a rental in June 2010. The bank took the house back at the foreclosure auction in 11/10. So it wasn't that long. What I have been seeing is that the houses when sold at auction if they aren't purchased by a lay person at the auction sale the bank will buy the house back. On my credit report it shows that the foreclosure was cancelled and the house was paid off in 11/10. This is when the bank took possession of the house. The mortgage loan officer I spoke to said that this is when the clock started on the 3 years. I probably could have tried a short sale but honestly didn't feel like the stress was worth it. But that is just me. You have to decide what is best for you. If you decide to try the short sale route you need to find a real estate agent that is well versed in it. Because you included the house in your BK and didn't sign a reaffirmation agreement you are not liable for any shortfall from a short sale or foreclosure. Hope this helps.
Heather
Heather

 

 

 

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iVillage Member
Registered: 09-24-2007

Arryl,

We moved out in June to a rental house in a better neighborhood. We needed to get out before the school year started so that my oldest would go to a better school district.

Desiree
Community Leader
Registered: 07-26-1999
I'll so some research, but even if it wasn't a part of the chapter 7 BK, I think Carolyn posted an article on here not that long ago about the tax issue because so many people are going through the same thing now. I'll see if I can dig it up and post it. But as always, you definitely want to check with an accountant about it since they'll be completely updated the most recent tax codes and laws.
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Community Leader
Registered: 07-26-1999

Desiree, here is some info that Carolyn posted a while back about taxes after a foreclosure.

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