Re: Probably short sale is the better choice - Posted by Vic
Posted by Vic on August 04, 2009 at 19:43:18:
Nancy,
Here’s the repurcussions.
Shortsale: If you can get the bank to do a short sale, then probably nothing will happen to you, other than your credit being ruined for a couple of years.
It used to be that the IRS would consider the difference between what you sold the house for (short sale) & what you owe on it to be a gain & would be taxable. This however has changed. The IRS now waives those taxes. It used to be that at the time of the short sale you had to show that you were basically insolvent at the time of the short sale in order to have those taxes waived. But like I said that’s been changed.
However, I’m not 100% sure though if they treat investment property the same as if it was your primary residence. So I don’t know if they would waive the taxes that might be due on a gain like this for investment property or not. Ask your CPA. Or just call one or two out the phone book, if need be, & ask them.
Give the properties back to the bank: If you give the properties back to the bank, you can ask them if they will sign a form (I forget the name of it - in my state of LA it’s called a Dation en Payment, but it will be called something else in your state) whereby they basically agree to take the property back & not sue you for the difference. I seriously doubt they will agree to this, but it doesn’t hurt to ask.
Foreclosure: Most likely what will happen if you give the properties back to the bank or if they foreclose on you, they will then turn around & sell the properties & get whatever they can for them. They can then sue you for the difference between what what was owed on the properties, plus attorney fees & what they sold them for. This is called a Deficiency Judgement. Once they get that deficiency judgement they can then go after other assets or income that you may have. Of course, if you filed bankruptcy that would negate the judgement, but then you would have a bankruptcy on your credit. But better a bankruptcy than a judgement of that size, assuming you have no other assets or cash just sitting in the bank that they can get.
So your best course of action, in my opinion, is to 1st rent them out if you can or do a lease/purchase, 2nd do a short sale (check with your CPA if that gain would be taxable or not) 3rd, let them foreclose.
Your worse case scenario is you have to file bankruptcy to negate the deficiency judgement, but even if you do this the bankruptcy will only stay on your credit report for 7 years. Unless the Fannie Mae guidelines have recently changed (& they may have), after a foreclosure you can qualify for a bank loan after 2 years, assuming no bad debt during that time.
If they get a deficiency judgement against you, that will stay with you forever until you either pay it off or file bankruptcy.
In any event, this isn’t likely to be something that will effect you the rest of your life, other than if they get a judgement against you & you don’t do anything about it.
Don’t kill yourself over this. It’s not the end of the world. You will be able to do things in the future to get your credit back to where it is now, so don’t stress out too much over this. You’ll be fine, it just may take a couple to a few years to get back to where you are now.
If you have any more questions, feel free to post them or email me.
Best of luck.
