Expert: Dick Dennis - 12/30/2008

Question
Hello, Dick

I live in Michigan and have a house in the metro Detroit area.  I took a buyout from the auto industry a year and a half ago and relocated, since my wife had a good job lined up.  For the past year, I have had my house (it is in my name alone) on the market, trying to sell it.  (It is an older home that I've put a lot of work into-it is completely updated and defect-free.)  We have now moved into the short sale arena, but we are getting absolutely no traffic through the house.  I have run out of money and can not afford this house any more, and I contacted Wachovia months ago to warn them of this.  Now that I have not made my last payment, they have started to talk to me.  They are pushing for a short sale and have told me that foreclosure may be a better option than deed-in-lieu, which would cost me $5,000 to $10,000.  Is it true that a short sale would render a form 1099, which would cost me taxes that equal 28% of my forgiven debt?  Besides the obvious credit impact, what would a foreclosure cost me on a $100,000 loan?  I have to get rid of this house one way or the other, and I've tried everything I can to do so.  Now that my options are looking very bleak, what is my best course of action?  Thank you for any advice you could offer.

Answer
Apparently your tax bracket is 28%, Steven, since they are telling you that it would cost you that much of the loan from which you would be walking away. As for how much it would actually cost you for a $100,000 loan, I suggest you talk with a tax expert, CPA or tax attorney to know exactly what it would cost you.

Yes, banks won't talk to you until you actually fall behind in your mortgage payments. I would recommend you persist with someone at Wachovia until you can negotiate an amount you can handle.

Be aware that the IRS regards any loan that has been forgiven as income to you. So, you really have to work with someone at the bank. If you give the keys to your house to the bank and walk away, then, yes, the unpaid balance of your loan would probably be the amount on which you would be taxed. Now you see why you should talk to that tax expert. I do wish you well.

Dick Dennis