Foreclosure Without Bankruptcy

20 Aug Foreclosure Without Bankruptcy

Can you escape your rising house payment by letting the bank foreclose?  Yes, but – and this is a huge “but.”  Allowing a first mortgage or deed of trust to foreclose, in most states, probably won’t wipe out a second deed of trust or mortgage or Home Line of Credit.  You’ll still be responsible for those payments. 

What’s worse is that a foreclosure without proof of insolvency generates a tax bill from the IRS for the “income” you receive by not having to pay the debt!  There’s just such a story in the New York Times, today.  As you can see in the story, proving “insolvency” to the IRS (like proving anything to our government) isn’t too easy, though it can be done.

The best answer, however – file bankruptcy.  It will wipe out any obligation under a second mortgage or deed of trust, and the IRS will accept that as proof of insolvency so there won’t be a huge tax bill generated. 

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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