We Gave Our Home Back in a Strategic Default But Have Some Residual Debt. – Marilyn

“Dear Steve,

My husband and I recently completed a strategic default and we feel very blessed — we are renting a great house at 2/3 what our old mortgage was. Our former home continues to drop in value — it is now for sale for $114,000 (and “valued” at $80,000) — we paid $245,000 with a 10% downpayment.

We have no car payments and three credit card debts: a closed AMEX ($10,000) a VISA ($1,700) and a MC ($2,300). All the interest rates are 15%. The bank lowered our credit limit to the amount of our debt (used to be $8,000 and $5,000) so now it looks like we’re right at the limit.

We pay about 1/3 to 1/2 more than the minimum each month and have not been late for the last 4 years at least. I also have a ginormous student loan that I thought was in deferrment when it wasn’t and so I’ve spent the past 9 months in a “program” with a creditor. I’ll be freed from that in May and will be able to negotiate a new repayment.

]1) because we “lost” the $25,000 downpayment when we walked away — is that considered an investment loss for taxes?

2) For health reasons, I will be going to part-time teaching beginning in September. I feel like the bank won’t do anything about our credit card interest rates because of our foreclosure, but it sure would be nice to have some help in paying them down faster when I’m bringing in less income. Sometimes I think that since our credit is wrecked anyway from the strategic default, so I was wondering if it would make sense to do a Chapter 13 bankruptcy. My attorney said that he thought the right judge would even reduce or release my student loan. (I am almost 60; my husband is 66-he’s also a teacher).

Marilyn”

Dear Marilyn,

It seems the bigger issue is if the forgiven debt will be reported to the IRS and you may owe income tax on all of that forgiven debt. I’ll ask our resident tax expert to come in and add his feedback to your situation in the comments below.

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If you are able to make the minimum payment and want an interest break then I’ve click here for credit counseling information. With a credit counseling approach the accounts will be closed but the interest rates may be reduced further so more of your payment is reducing the balance.

I really like the folks at Cambridge Credit Counseling and you might want to contact them for some advice on that.

A Chapter 13 bankruptcy is not going to discharge your student loans. In order to discharge them you’d have to show undue hardship and may have to file a Chapter 11 bankruptcy for that purpose.

If these student loans are government backed and your income may be reduced, your better bet is to look into the Income Based Repayment Program or IBR.

A follow-up bankruptcy to the default makes sense if you live in a state where the lender can go after you for the forgiven balance. In that case the mortgage deficiency would be a huge anvil hanging over your head and a Chapter 7 bankruptcy would be optimum.

It may make good sense for you to consult with a local bankruptcy attorney licensed in your state who could advise you on this. You can click here to find a local bankruptcy attorney.

Please post your responses and follow-up messages to me on this in the comments section below.

Sincerly,


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.
Damon Day - Pro Debt Coach

Steve Rhode

2 thoughts on “We Gave Our Home Back in a Strategic Default But Have Some Residual Debt. – Marilyn”

  1. Dear Marilyn:

    In regards to the tax issue, any losses on personal residences are not deductible. The better question, as Steve pointed out, is the cancelled debt considered income to you.

    When you receive a Form 1099-C for the cancelled debt, you will need to report it on your tax return. If you meet all of the criteria for qualified principal residence indebtedness, then you may exclude the cancelled debt from taxable income. The criteria can be found at the IRS site: http://www.irs.gov/individuals

    Keep us updated Marilyn.

    Jim

    Reply
  2. Dear Marilyn:

    In regards to the tax issue, any losses on personal residences are not deductible. The better question, as Steve pointed out, is the cancelled debt considered income to you.

    When you receive a Form 1099-C for the cancelled debt, you will need to report it on your tax return. If you meet all of the criteria for qualified principal residence indebtedness, then you may exclude the cancelled debt from taxable income. The criteria can be found at the IRS site: http://www.irs.gov/individuals/article/0,,id=179414,00.html

    Keep us updated Marilyn.

    Jim

    Reply

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