If you are in the process of a short sale, a bankruptcy may be the next step after your short sale to shore up all of your debt and help your credit improve. Today, a short sale seems commonplace among the Riverside and Orange County areas. Southern California has taken a significant impact from the financial crisis due to high outstanding mortgage amounts with low home values causing an “upside down” loan. One of the popular solutions to this problem is a short sale where the bank approves a sale of a home at a lesser value than the outstanding mortgage amount.
In a short sale, a bank can either forgive the deficiency amount which is the difference between the sale price and the outstanding loan amount or they can also make you responsible for the deficiency amount on the property. Some mortgage lenders will hold you accountable for the disparity between the sale price and the loan amount. Fortunately, if you no longer own the home, this deficiency is categorized as unsecured debt. Unsecured debt can be eliminated in a Chapter 7 bankruptcy. A Chapter 7 bankruptcy can discharge all unsecured debt including credit card debt, payday loans, past due utilities, etc. Your mortgage deficiency will be considered unsecured debt because you no longer own an asset that is attached to the debt which was the home.
If your mortgage company is going to keep you responsible for the deficiency amount after your short sale, don’t give up and settle for foreclosure. You may be able to use Chapter 7 bankruptcy to eliminate the debt. When you use bankruptcy to eliminate debt, you do not get a 1099 for income tax. If the bank forgives the debt, they may send you a 1099 for the deficiency amount for which you will be responsible for income taxes. Debt which is discharged through bankruptcy will not incur any income tax liability.
If you are in the Inland Empire, Riverside, Desert Regions, Bankruptcy Law Professionals has the right Riverside bankruptcy attorney for you. We also have an office located in the Tustin and Santa Ana area to serve Orange County with our top Orange County Bankruptcy attorneys. To make an appointment, please contact us at 855 257-7671.