When the foreclosure sale looms large, filing for bankruptcy protection prior to the sale date is probably the only smart move. It avoids the unpleasant post-foreclosure sale tax hit, and frees you from owing the bank anything.

Those of you who have followed these posts for a while know that I have predicted a new wave of residential and commercial foreclosures. I stand by that prediction, the residential portion of which has just been bolstered by a recent article by Don Lee in the Los Angeles Times:
Continue Reading

A recent corrupting trend in Chapter 13 bankruptcy is creating serious challenges for honest Chapter 13 debtors, their attorneys, mortgage companies, and Bankruptcy Courts.  The problem is a new foreclosure scam called property dumping, and it illustrates the ingeniously evil thinking of some real estate crooks.

Property dumping has cropped up in response to the

I. The Classical Home Loan

At one time – sounds like a reference to the “olden days”, but it wasn’t so long ago – a borrower was expected to put 20% down as part of borrowing 80% of the purchase price of a home. The fixed monthly payment had two components: interest and principal. The interest was calculated as one-twelfth of the annual interest rate times the current principal balance. The principal was the difference between the monthly payment and the interest. Pretty simple. After thirty years of making the payments you owned the house. Things were a bit more complicated if the monthly payment included homeowner’s insurance and property taxes, but this was a minor adjustment to the basic idea.

II. The Community Reinvestment Act

The CRA was enacted in 1977. However, aggressive enforcement beginning in the mid-1990s sowed the seeds for the current financial problems. Why? It helps to know what the CRA requires. Yaron Brook of Forbes observed:

The CRA forces banks to make loans in poor communities, loans that banks may otherwise reject as financially unsound. Under the CRA, banks must convince a set of bureaucracies that they are not engaging in discrimination, a charge that the act encourages any CRA-recognized community group to bring forward. Otherwise, any merger or expansion the banks attempt will likely be denied. But what counts as discrimination? According to one enforcement agency, “discrimination exists when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.” Note that these “arbitrary or outdated criteria” include most of the essentials of responsible lending: income level, income verification, credit history and savings history – the very factors lenders are now being criticized for ignoring.

Once the traditional lending criteria were jettisoned, banks started issuing mortgages to people who couldn’t put 20% down. These borrowers – we’ll call them CRA borrowers – had to borrow more than 80% of the purchase price. The larger loan meant a larger monthly payment, which was also a problem. The solution: option ARMs.
Continue Reading

It is not news to say that today’s real estate market is terrible.  Many “homeowners” are quite literally hundreds of thousands of dollars underwater.  I put homeowners in quotation marks because someone who is underwater does not really own a single molecule of the house.

This leads many to surrender their houses as part of the bankruptcy process.  Surrender of the house can be very sensible if the debtor can’t make the payments, and has negative equity.  When the Bankruptcy Court grants the debtor a discharge, the personal liability on the mortgage is discharged.  Moreover, since the debt is discharged in the bankruptcy, there is no cancellation of debt income, so there is no adverse tax consequence to the surrender.  In addition, any prepetition homeowners association (HOA) dues are discharged because they were incurred prior to filing the bankruptcy papers.

However, postpetition HOA dues are not discharged in the bankruptcy because they are incurred after the filing of the bankruptcy papers.  See 11 U.S.C. § 523(a)(16).  In the current real estate market this unfortunate fact can create a real problem because if the debtor surrenders the property the lender is not required to take possession of it, or record a transfer of title.  In the vernacular:  you take force someone to accept a gift.
Continue Reading

I.          The Basic Idea:  Cancellation Of Debt Income

Let’s first understand the basic idea with a simple non-real estate example.  Suppose you owed me $100,000.  I’m such a nice guy that I forgive the debt.  It turns out that this becomes a mixed blessing because now the IRS and the Franchise Tax Board (FTB) both