The Law After the Expiration of the Mortgage Debt Relief Act
Before you consider a short sale or foreclosure in 2014, here is the law you should know.
First, there are two types of debts. They are unsecured and secured. Unsecured debt is the bare promise to pay. The most common form is credit card debt. Secured debt, on the other hand, has two parts. The first part is the bare promise to pay which on a car loan or real estate loan is the Promissory Note. What makes secured debt different than unsecured debt is the security given by the borrower to ensure the promise is kept. This security on real property is called a Deed of Trust.
Second, on real estate loans, there are two different types of promises to pay. Non-Recourse or Recourse. A Non-recourse loans is (1) the loan or loans obtained to purchase a 1-4 unit property in which the borrower occupies at least one unit (2) seller carry back or (3) a refinance after 1/1/13 with no cash out. Everything else is recourse debt i.e. the refinance of the real property with cash out, lines of credit, the loan or loans used to purchase a rental property.
Third, personal liability depends on whether you do a short sale or foreclosure. If you do a short sale, California Code of Civil Procedure (“CCP”) 580e provides that there can be no deficiency owed, collected, requested or rendered for any lender approved short sale of a one to four unit dwelling. What this means is that a property owner cannot be held personally liable if the lender has agreed to the short sale.
If a property is foreclosed in a non-judicial sale, you will not have any personal liability as to the loan that is foreclosed on because California is an anti-deficiency state i.e. the lender waives its right to come after you on the loan that they foreclosed on. However, if there are junior liens to the foreclosing lien, they will have the right to sue you after the foreclose. They are called “sold out” junior i.e. they lost their lien, but they still have the promise to pay and thus have the right to sue you on the promissory note.
Fourth, in every short sale or foreclosure, there are potential tax implications. The IRS/Franchise Tax Board (“FTB”) wants to know two things. (1) Did you make any money on the deal and (2) Did you borrow any money which was not repaid. If you made money on the deal including taking out cash to buy another house, buy another car, pay off credit card, you may have gain. If you borrowed money which is not repaid either through a foreclosure, you may Cancellation of Debt Income (“CODI”). The great news on the short sales in 2014 is that both the FTB and the IRS have agreed that there is no CODI on short sales pursuant to CCP 580e. However, these rulings do not apply to foreclosures. There are exceptions to the CODI which will apply on foreclosures, but they are limited.
In conclusion, a short sale or foreclosure without legal advice is like jumping into the middle of the ocean with no life vest. Don’t do it. Do not take on liability which could have been eliminated or reduced with first obtaining legal advice. I see people every day for a free consultation on short sales and foreclosures in Walnut Creek and Brentwood.
WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A SHORT SALE OR FORECLOSURE. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.
© 2014 Joan Grimes