I really don’t have much debt, but my house
is totally underwater, so I’m thinking about doing a short-sale and it looks good. Should
I just do that, and maybe skip out on the bankruptcy? My name is Ron Drescher. I’m an
attorney practicing bankruptcy and creditors’ rights in Maryland, Delaware, Pennsylvania,
and Virginia. For years, and years, and years during the terrible real estate down-turn
that we’ve experienced, congress had a law that said if you sold your primary residence
for less than what you owe and the creditor releases you from the deficiency between what
you owe and what they get in the short sale, you don’t have to pay tax on the discharge
of indebtedness income that you get after the short sale. That was great. That kept
a lot of people out of bankruptcy. Well that law expired on December 31, 2016 and you know,
congress hasn’t yet renewed it, and congress may renew it still, we don’t know, but if
congress doesn’t renew it and you do a short-sale and you get a discharge if indebtedness income,
the bank is going to send what’s called a 1099C to the IRS for the amount that they
forgave as a result of that short-sale and you’re going to have to pay takes on that
money, because that’s going to be considered income to you, and those taxes are not going
to be dischargeable in your bankruptcy case for at least 3 to 4 years, so you’ve taken
a dischargeable debt, which would be the deficiency on the home mortgage that could be discharged
in bankruptcy, and turned it into a non-dischargeable debt, which is the tax obligation on the amount
that the bank reports to the IRS that they forgave. I think that�s pretty much a disaster.
Now, what you can do is you can file the bankruptcy case, and when you file the bankruptcy case,
the discharge of that debt is not considered income to you. It’s one of the exceptions
in the internal revenue code, and then you could still do the short-sale. The advantages
the short-sale in those situations aren’t really clear, but it is an opportunity that
you have and in certainly in a chapter 13, if you do a short sale and you get rid of
the deficiency on the home, that can have a very beneficial impact on your chapter 13
case. You could save a lot of money over the life of your income. These are really complicated
concepts, but the concept that’s not complicated, is that if congress does not renew that law
that protects the release of a deficiency following a short-sale, you can be stuck for
a big, non-dischargeable tax debt, and that would make it far superior and more favorable
for you to file bankruptcy instead. My name is Ron Drescher. I’m an attorney practicing
bankruptcy and creditors’ rights. If you have a question about whether you ought to do a
short-sale instead of filing bankruptcy, please pick up the phone and call me. I would love
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