1. Recourse or Non-Recourse Loan on 2nd loan that received debt forgiveness? Judicial vs Non-Judicial foreclosure process?

Asked about 2 years ago - Oakland, CA

I am confused. First loan is $550k and 2nd loan is $150k for primary house in California--- included when I filed BK7 in 2009, discharged early 2010. Primary house is now in foreclosure; NOD was filed Oct 2012. I am confused because I received debt forgiveness from BofA for 2nd loan ---- is my mortgage loan considered Recourse or Non-Recourse loan? No Trustee Sale date yet, but is my house being foreclosed via Judicial or Non-Judicial process? I just want to make sure that I don't have to pay taxes after 2013 foreclosure.

Thanks in advance for shedding light on this.

Attorney answers (4)

  1. 8

    Lawyers agree

    Best Answer
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    Answered . I agree with Ms. Sinclair. To clarify - you filed a bankruptcy and received a discharge. Assuming that you listed both the first and second creditors with liens on your home, and you did not reaffirm either debt, then your obligation to pay the debts is gone. Even if either of these loans had been a recourse debt, the discharge makes it a non-recourse debt. It does not matter if the lender is using a judicial or non-judicial foreclosure. Most of these answers change if there is a reaffirmation signed by the Bankruptcy Court.

    Taxes - in addition the lender might file a 1099 with the IRS, but you will file a 982 form showing that these debts were discharged in your bankruptcy. Make sure that you file that form. Better yet, talk to a competent tax attorney or CPA about your situation.

    My best to you.

    This firm is in the business of helping people and companies file for bankruptcy protection. Therefore, the... more
  2. 6

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    Answered . If you let your property be sold through a trustee's sale, assuming it is the first that is foreclosing, at least with respect to the first loan, you should have no concerns about either tax or deficiency liability. Now if the first forecloses on you and the first and second belongs to the same lender, there is a very good chance there is no personal liability whether the loan is recourse or non-recourse. This isn't a short sale. Therefore, in any of these scenarios, you most likely need not worry about tax liability. Of course, you can still use the insolvency exception even if for some strange reasons you realize an income as a result of the trustee's sale which I have never heard of. When it comes to tax issues, always best to check with your CPA who knows your financial situations more than any one of us here. Just ask him.

  3. 6

    Lawyers agree

    Answered . It may be hard to imagine B of A doing something frankly consumer-friendly, but that may well be the explanation. Presumably your bankruptcy discharge relieved you of personal liability on both notes. Under IRS regulations that consitutes "debt foregiveness" calling for the filing of a Form 1099-C. Debt foregiveness tax liability can be excused for certain reasons (read Form 982 and the related instructions at www.irs.gov). One reason, foreclosure of primary residence, is set to expire, so B of A is beating the deadline. Whether you have received notice of a pending 1099 or a promise to not file a 1099 is not clear from your question. Note that your bankruptcy also entitles you to relief with Form 982.

    Please note that my practice experience is deep in bankrtupty, where we are seeing more activity as you have described, but I do not practice tax law. With luck and attorney with that expertise will tell us both if I have missed something.

    Best wishes for a favorable outcome, and please remember to designate a best answer.

    This answer is offered as a public service for general information only and may not be relied upon as legal advice.
  4. 4

    Lawyers agree

    Answered . Recourse or no recourse... that is the question... but not really, I say... the term "no recourse" is misleading in that it implies that a lender has no ability to do anything to a borrower who does not pay the "mortgage." Lenders in California who have a deed of trust can (with very very few exceptions, and those exceptions generally mean the deed of trust is not valid) can foreclose (take the property) plus ding the borrower's credit scores during the delinquent period plus one final smack upon the foreclosure. Judicial versus non-judicial foreclosure? Complicated laws apply to each in California, but the good thing is that, in general, lenders use a trustee's sale (non-judicial) on personal residences and only use judicial means on commercial loans... though there have been a few Hollywood movie types with quite expensive homes who have been hit with a judicial attack as these types have a lot of other assets to make up the difference between a mansion's current value and the millions more owed. When dealing with the complex issues of hundreds of thousands of dollars of potential liability, one should not hesitate to spend a small amount to hire a mortgage / real estate lawyer for a one on one meeting to get specific advice and education about that person's actual exposure. If such a person had previously used a bankruptcy attorney, that attorney may be the place to try first for such advice.

    From my firm's website:
    THE ONE-HOUR CONSULTATION: Recognizing the great value in getting sound legal advice when taking part in any real estate transaction, more and more and more clients are hiring us for the "one hour real estate consultation." During your one-hour one-on-one consultation with one of our attorneys you will receive legal advice on any of the following: (1) New Home Purchases and Loans - verify the truth of what your agents and brokers have been telling you while one of our attorneys goes over the documents with you; (2) Loan Modification - find out if you really have a chance of getting your loan modified and what to expect if you do, or don't, discuss your lender's offer of trial or permanent modification and the accompanying paperwork and learn what "trial modification" means and what it does not mean; (3) Short Sale - discuss the short sale process and the liability associated with it and discover whether your agent or broker told you everything you really should know; (4) "Strategic Default" - discuss the legal ramifications of allowing foreclosure and find out if you can really just "walk away from an upside down home; (5) Suing Your Lender - learn whether you should get a forensic loan document audit, whether you can sue your lender, and what to expect if do sue your lender in California State or federal Court; (6) Unsecured Debts - obtain advice on how to negotiate with creditors, discuss the bankruptcy option, and find out what rights you have to protect you from creditor harassment. Please call to schedule an appointment and get more information including the fixed fee for this service.

    - Paul

    Paul J. Molinaro, M.D., J.D.
    Attorney at Law, Physician, Broker
    Fransen & Molinaro, LLP
    980 Montecito Drive, Suite 206
    Corona, CA 92879
    www.fransenandmolinaro.com / www.888MDJDLAW.com
    "When you need a lawyer, call the Doctor... Call Paul J. Molinaro, M.D., J.D... Call (888)MDJDLAW."

    * This post and all others I make on Internet are for informational purposes only. None of the information or materials I post are legal advice. Nothing I post as comments, answers, or other communications should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing of this information does not constitute, an attorney-client relationship. While I try to be accurate, I do not guarantee accuracy.

    ** Fransen & Molinaro, LLP practices in the areas of personal injury, medical malpractice, and real estate law.

    Paul J. Molinaro, M.D., J.D. ... Attorney at Law, Physician, Broker... Fransen & Molinaro, LLP... 980 Montecito... more

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