I’m Separating From My Husband, Filing Chapter 7 Bankruptcy and Want to Do a Short Sale. – Tina

“Dear Andy,

Originally purchased house in 1999 for 162,500. We have refinanced about three times over the years to help pay for some credit card repayment and also home improvement. The cost of refinancing has added about $10K on average each time, with the last re-fi adding on $20K (special loan because of PMI issues). (The last re-fi was done last year and the house was appraised at the time for $347K.) So in addition to using the equity in the house, we’ve racked up about $40K in closing costs alone. Upshot: Mortgage balance in June was $317K but we haven’t been able to pay for three months, so the interest is adding up – about $6000 worth.

We are about to foreclose, but there is someone insterested in the property. I know this person and he’s not going to want to pay more than $280K for it.

Complicating this issue is that fact that my husband and I are separating, and I’m filing chapter 7. the credit cards that are in my name only will be discharged, but what will happen to the house? It’s inboth our names.

Should we do short sale with this person? What kind of tax liability will we have?


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Dear Tina,

Both short sale and bankruptcy can allow you to let the home go. A short sale will require a bit more work on your end, but it could help you to avoid bankruptcy if you so choose. To get started with a short sale you should contact a local real estate broker to assist. Even if you already have a buyer and you don’t need extensive marketing of the property, the lender will pay all real estate commissions, so it makes sense to have professional representation to protect you. No matter what you do, NEVER allow the Buyer to negotiate directly with your lender to arrange the short sale himself. Even if you know and trust the person. There’s just too much that can go wrong if you’re not represented properly.

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As for the tax implications of a short sale. As long as the property is your primary residence (meaning you actually live there) and you sell the home before 12/31/2012, you should be exempt from paying taxes on the forgiven balance. The program is called the Mortgage Forgiveness Debt Relief Act and you can read more about it here. Of course, you should always consult with your accountant or another qualified tax professional to get specific advice on your specific situation.

Good luck and please keep us posted on your progress in the comment section below.

Best Regards,

Andy is a licensed real estate broker in Massachusetts and is the founder of Northeast Properties in Norton, Massachusetts. His brokerage is designed to help homeowners in today’s difficult real estate market, specializing in short sales. Andy speaks with Massachusetts homeowners every day, helping them to address their questions or issues with short sale or loan modification. He enjoys helping consumers arrive at the correct solution to their problem, and believes that the only way to correctly do that is by presenting them with all of their options in an un-biased manner.

If you have a mortgage, short sale, real estate, or loan modification question you’d like to ask just use the online form. I’m happy to help you totally for free.

Broker/Owner of Northeast Properties – real estate brokerage
President/Owner of Northeast Settlement Group – performance based debt relief
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