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Mortgage discharged in chapter 7 bankruptcy. Can I now short-sale the property instead of foreclosure? Taxable as income if I do

Los Angeles, CA |

The question is whether or not I can short sale my home after it was discharged in bankruptcy.. The plan was to surrender the home. I would like to avoid the foreclosure if I could. My friend is a real estate agent and wants me to list the house with her.

1. Can I still do a short-sale?
2. Should I?
3. Could it become a 1099 income situation against me if I short sale?

Attorney Answers 3


1. Yes, after the discharge, you can conduct a short-sale.
2. Probably not - no real benefit to you since your personal liability has already been discharged.
3. Depends on amount of loss, but probably not, pursuant to the Mortgage and Debt Relief Act (see link below to IRS Publication 4681 for more information. These are my opinions and I am not licensed to practice law in California, so do not rely on my statements - seek local counsel for more information.

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You can do a short sale, but my general opinion is not to. Having filed for bk, there should be no more reporting on your credit one way or another with regards to this house. Real estate people are always misrepresenting the benefits because they don't know the law or because they're going get $, period. I see no potential benefit to you, your credit wont be better. If you short-sale the house, you open yourself to potential lawsuits from the buyer, if they become dissatisfied. What would happen if the roof fell in and hurt somebody? The house had mold? You'd have a post bk lawsuit on your hands and you would have gotten 0 (zero) for taking that risk. If it were me, I wouldn't do it.

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1. Yes. You can do it even during your bankruptcy by filing a Motion to Abandon the property;
2. If you want to do your friend a favor so that she can earn the commissions. Be wary of this because an inexperienced person who has not conducted short sales might not be as successful. The other reason is that you might get to live in the house while you are trying to short sale the property; and
3. Debts discharged in bankruptcy (which I assume it was), are never subject to a 1099. Not to mention that even if you had not filed bankruptcy, there was a new California statute enacted in the beginning of the year that disallows tax liability for deficiencies after short sale.

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