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Hi all,

First, let me take a moment to say thank you in advance for taking the time to read this and offer me any advice you may have. It is much appreciated.

I came on here to post this question about a situation I'm going through and ask for your help, only to see that another similar thread had been started in the past day as well. However, this one's a bit different and so I'm starting a new thread for it. Hopefully this makes it less confusing.

Anyway, here's the situation. It actually has to do with my mother-in-law's home, not mine. She lives in Florida and has been talking for a few years now about moving up to the Philly area to be closer to her three kids. And for some brief background, she is low-income, disabled, and living entirely off of Social Security Disability. She put her name on a waiting list for a HUD housing community in the Philly suburbs a while back, and her name's come up and she's been invited to move up here. However, she has to decide in the next week or so if she wants to make the move, and part of that process involves figuring out what to do with her current home in Florida.

Obviously, per the title of this thread, that home in Florida is also fairly underwater (70k left on it vs. being worth 50k or so). She has been trying to find out whether walking away from it or short-selling would be better. From what I could find out, there are three main differences: 1) credit implications, 2) tax implications, and 3) the bank's ability to come after the 20k deficiency. In her case, 1) the credit implications are not that big of a deal because she just went through a bankruptcy last year and so her credit's already mostly shot; 2) the tax implications seem to be nil because of the current law (through 2013) forgiving that deficiency as income on a primary residency; but it's #3, the bank's ability to come after her for 20k, that seems to be worrying her. Now, she really doesn't have much to come after (her car?), but this is still her big concern. Short-selling in general seems like a better option, if it's doable, but I'm trying to figure out if it's worth it or not for her. It seems like a lot of trouble even finding a buyer, and that's if the bank will go along with the plan at all.

I have a few specific questions, if anybody knows the answer to any of these:

1) Are there any negative consequences of walking away that I've failed to consider aside from the three I laid out above?

2) If she chooses the short-sale option and the bank agrees to it, does she have to keep paying her mortgage until a buyer is found?

3) This is more of an opinion question, but would you recommend going through the trouble of trying to short-sell or should she just walk away?

4) When someone is debating short-selling vs. walking away, is this something they generally talk to the bank/lender about or is the fact that you're going through that decision-making process something you to try keep secret from them?

That's all I can think of for now, but I'm sure I'll think of more questions over the course of the rest of the day. Also, I'm sure I've left out some pertinent information, so feel free to ask me any questions you may have. Any general thoughts you have are more than welcome. I'll be around all day and through the weekend checking in as I try to sort this out.

Thanks again for any help you may be able to provide.
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She has been trying to find out whether walking away from it or short-selling would be better.

She should stop making payments immediately--live in it or move--and find a realtor who can determine how much "short sale incentive" she can get. What the heck...the deficit doesn't matter, anyway, so why shouldn't Mom get her "fair share?"

http://www.pe.com/real-estate/company-news/20120525-bofa-enh...
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Wouldn't the bankruptcy have included her mortgage? If so, I think that would prevent the bank from coming after her for any shortage. That would be a question to ask her BK attorney.

--Peter
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I don't have an answer, but reading your post made me wonder if she waited until 2014 - or say she tried a short-sale first and it dragged into 2014 - would the deficiancy being included as "income" at that point make her ineligble for SSDI? If so, she needs to decide what to do quickly and make it happen in 2013.
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I'm not sure if the bankruptcy did or did not include her mortgage, but I do know that at some point in the past year or two her mortgage was renegotiated to drastically reduce her monthly payment (whether that was as part of the bankruptcy or not I do not know) by giving her a 40 year mortgage I believe.

It might be taxable in 2014, but if this happens, it will probably happen this year (as soon as next month, even). You do raise an interesting point, though:

At one point in the past few days I know she thought about trying to rent the place out for a year just to give her some extra time to sort out how to get rid of it and to give her a backup plan (moving back) if things don't work out up here. However, if she does that, then your potential tax scenario comes into play. She would still be eligible for SSDI, so that's not my concern, but the deficiency might be taxable. Additionally, her rent in her HUD apartment is based on a calculation of her income, and the rent she receives might count towards that and raise her rent. This is definitely something worth looking into.

Also, to CCinOC- would you mind explaining the idea of "short sale incentive"? I'm afraid I'm missing it.
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I forgot to mention the taxable income part. There are other ways to exclude cancellation of debt from taxable income besides just being your home. One of those is insolvency.

If she is insolvent, then she wouldn't have any taxable income even in 2014 and beyond. Total up the fair value of her assets and the actual amount of her liabilities just before the potential foreclosure. Subtract the liabilities from the assets. If that number is negative, then that is how much of the debt cancellation she can exclude from income.

Based on what you've mentioned, I'd guess that the home and furnishings, plus possibly a car are her main assets. We also know there's a mortgage, and she might have some other debts. I think it's pretty likely that she's insolvent and will still be able to exclude most or all of the debt cancellation from her taxable income even after the home exclusion expires.

--Peter
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Also, to CCinOC- would you mind explaining the idea of "short sale incentive"? I'm afraid I'm missing it.

Many lenders are PAYING homeowners to move out of the house to allow for a short sale. Yup--at the close of escrow, a distressed homeowner can receive up to $45,000 as an incentive to avoid foreclosure.

There are articles all over the internet about this phenomenon. Short sale incentives are no urban legend.

http://www.cnbc.com/id/46454093/Lenders_Paying_Borrowers_to_...

http://money.cnn.com/2012/02/10/real_estate/short_sale_incen...

http://www.bloomberg.com/news/2012-02-07/banks-paying-homeow...

The booty has increased to $45,000.

http://www.reuters.com/article/2012/07/25/us-column-personal...

You need to find a real estate agent who knows about this, as the incentive must be built into the contract that is submitted to the shorting lender.

http://www.cdpe.com/find/cdpe
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One of those is insolvency.

Here's the rule straight from the horse's mouth.

http://www.irs.gov/publications/p4681/ch01.html
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