Expert: Regan Shinski - 9/13/2009

Question
QUESTION: Hi Regan,

I'm not sure if you can answer my question but hoping you can. My father just recently filed for bankruptcy and his home has foreclosed.  I've been very frustrated b/c the bankruptcy lawyer we are using is not very knowledgeable and did not know that once a foreclosure already took place, it cannot be placed in bankruptcy. He advised that we see a tax advisor, which I understand we should have for tax advice but frustrated since he not know this as a legal issue - NOT a tax issue. Now my father is faced with tax consequences of the cancelled debt.

The bankruptcy attorney just filed yesterday, however he is not sure whether to place my father mortgage loans (1st and 2nd) in the secured or unsecured debt column within the bankruptcy forms.  I spoke with a Tax Advisor and she advised, since the foreclosed just happened (9/8) it is no longer in his name, therefore it is not his debt.  My question is would you happen to know where should this be claimed on the bankruptcy forms (i.e. unsecured or secured)?  It is such a time sensitive matter, however, I am sensing there is still a possibility that the lender did not forgive the debt and issued a 1099C yet and I'm hoping that my father bankruptcy filed on time.  Please advise when you have the chance.  Thanks soo much for your help!

ANSWER: There are so many variables here it hard for me to say with certainty.  What stage the foreclosure is in and what STATE it is in are big ones.

I would contact, or have your attorney, contact the lenders and find out the status of the debt.  Get it in writing.  If it is still your father's debt (likely), the bankruptcy petition needs to be amended.  The debt can be secured, unsecured, or both.  If your lender is on the ball, it was likely a perfected and secured debt.

Another way to look at it is by the amount of the debt.  For example, if you had a $200,000 loan and the house is worth - say - $200,000 obviously it would be secured.  If you are far enough in the foreclosure process where they are only showing a $50,000 shortfall (after resale) debt, it should be an unsecured debt since the debt is longer tied to the property that was securing it.  I hope that made sense, that is probably the easiest way I can explain it.

Your attorney SHOULD handle this.  If he needs to consult with someone else, you should demand it at his expense.  Any error needs an amended petition to be filed with the court quickly.  If it was your attorney's error, he should pick up the court costs associated with the amended filing.

Again, this is a VERY complicated process with many variables that vary by state and timing.  I strongly suggest you get another legal opinion in addition to mine.  Especially, if your attorney seems inexperienced.

Good luck, let me know if I can help further.

Regan

p.s.  Your father should start credit repair and rebuilding immediately after the discharge.  This is my strongest area of expertise, so feel free to contact me at that point as well.

---------- FOLLOW-UP ----------

QUESTION: Sorry for bombarding you with questions.  My mind is running all night and I had another question if you can help clear up.  If, let's say I call the lender and find out the mortgage loan is still a secured debt, his personal liability is discharged in bankruptcy if my father surrenders the property, correct?  Therefore, does this mean the lender also cannot seek a deficiency judgment and file a lawsuit - and NOTHING will be owed?  

However, if I found out it's too late in the filing in BK and the secured debt becomes unsecured, the lender has two options: forgive the debt and issue 1099 to IRS -OR- seek a deficiency judgment.  Please confirm if my understanding is correct.  THANKS SO MUCH!!

Answer
There are a lot of factors at play here, so you really need an attorney that is on top of this.  If your attorney is not certain, you should either get another one or the attorney should pay or do the research to get the proper answers.  There are just so many factors:  Ch 7 or 13, what state, amounts owed, how many mortgages, what stage, and many more variables that make it tough for me to answer with certainty.

However, in general, bankruptcy is designed to let you walk away and get a second chance, not burden you with the credit stigma of a BK AND massive debt.  The court should have it set up (in CH 7) where you are forgiven any shortfall and the bank gets the property.  However, you will not be allowed to forgive mortgage debt AND keep the house.

So, essentially, you are correct in your question but it must be done properly.  Be sure you are confident in your attorney's knowledge (or ability to get the answers he/she does not know) and don't be afraid to get clarification from the court or others.  Don't rush into closing the BK if you are not sure it is filed properly.

Please be sure to see the answers to your other questions because we overlapped e-mails here.  They are all kind of intertwined.

Good Luck,
Regan