Though Arizona’s housing market is recovering faster than most states in the nation, prices for homes are still high and inflation remains to be a concern for most potential homebuyers. Houses are like any other functional consumer good, and their prices are affected by short-term supply and demand as well as long-term inflation.
Nadya Suleman, known by many as the “Octomom,” filed for Chapter 7 bankruptcy in California on Monday. She admitted that she has accumulated over $1 million in debt, owing money to the city’s water department, Sylvan Learning Center, Whittier Christian School, and her father. A court-appointed trustee will liquidate her assets, estimated at $50,000, before she is discharged from the remainder of her debt. At the time of her filing, Suleman owed 20 times more than her total net worth.
It can be surprising to learn that after debts owed to a bank or individual are canceled, income taxes can still remain. This issue comes up frequently in connection with escaping distressed real estate. Following a foreclosure or short sale, it is not uncommon for a bank to issue a 1099 to the borrower and the IRS indicating the amount of debt canceled. The amount of debt cancelled may result in significant tax liability.
Since the real estate market began to decline in 2006, followed by its dramatic crash in 2007, I have counseled many hundreds of individuals needing to escape distressed or underwater properties. There are several common elements in the concerns of those homeowners. Some have wanted to attempt a short sale, others preferring to simply allow foreclosure to occur. Over the past few years I have become increasingly convinced that most owners’ concerns are based on three crucial questions which must be answered when determining whether or not it’s possible, or even advisable, to attempt to dispose of a distressed property.
A benefit of fling a Chapter 13 is that it comes with the ability to strip a 2nd mortgage or home equity line of credit. If you are “upside down” on your home (meaning that you owe more on home loans than what your home is worth), a lien strip could be the most powerful tool to protect you from creditors. Since the recession began, millions of Americans found the value of their homes decrease in value and now owe more than the appraised value of their home. And if you are a homeowner with a second mortgage, owing more than your home is worth can be a major financial burden.
Due to the unprecedented real estate market, many people are facing the very difficult question of whether to let their underwater homes go by short sale, foreclosure, or surrendering the home during bankruptcy. In many cases a short sale may be the best option; however, in cases that involve recourse loans, it may be in your interest to surrender the home through bankruptcy.
For the many people who live in trailers, I want to address the significant differences in the laws of manufactured homes compared to those of traditional home residences.
A common misconception of bankruptcy is that those who file will be stripped of everything and left to live in a cardboard box. This is not true. As is often the case, those who go into bankruptcy owning a home often come out of it still owning their home.
Recently, during my daily trek to work from Queen Creek to Mesa, I heard a radio spot announcing that the housing market is on the verge of the second dip of a double dip recession. I cringed at the thought of what this would mean for my home and wondered if I would be able to sell it should my family ever outgrow it. I arrived at work, only to find half a dozen emails from folks looking for legal advice – half of which were concerning the very subject I had been considering on my drive to work.
On the way in to the office this morning there was a news story on the radio about homes in Arizona. A full 50% of home owners owe more on their home than it is worth here in Arizona. You may have the same thought I did — is that it? Who are these people that have positive equity, or at least are not upside down, in their home? The story went on to state that strategic defaults (i.e., just walking away) on home loans are increasing and further lowering the housing prices here in Arizona. The reality of it is…
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