Bankruptcy and Foreclosures

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In the current real estate market, more people are facing bankruptcy and foreclosure. Attorney Diane Drain, who specializes in both real estate and bankruptcy, explains how homeowners can avoid foreclosure and, if necessary, how to file for bankruptcy.

Jose Cardenas:
Arizona has one of the highest foreclosure rates in the country. Many adjustable rate mortgages will start resetting soon and the break that lenders gave on foreclosures before the holidays are over. Job losses are rising and the combination of everything could lead to more people to considering filing bankruptcy. Horizons Ted Simons talks to an attorney who specializes in bankruptcy and real estate and the ramifications regarding both issues.

Ted Simons:
Here now to talk about real estate foreclosures and bankruptcy is attorney Diane Drain who focuses on both real estate and bankruptcy. She is also a member of the Board of Directors of the state bar of Arizona. Good to have you here. Welcome to Horizon.

Diane Drain:
Thank you for inviting me.

Ted Simons:
Concerns when working out a foreclosure and a bankruptcy. What should folks be aware of?

Diane Drain:
Certainly from the foreclosure side, they need to know what the consequences of a lender not receiving the full amount that they are owed. Once a foreclosure is completed there's a credit hit because there's now foreclosure on their credit. There could be an opportunity for the lender to sue the borrower for losses that the lender suffered. If not that, that's called a deficiency. If not that, then there could be tax consequences, called forgiveness of debt that roll out of a foreclosure or short sale.

Ted Simons:
There also has to be concern with the lender as well because lenders promise things but sometimes either those promises don't happen or they happen in such a far distant future that a lot of things happen in between.

Diane Drain:
Well, unfortunately, the lenders are really have been taken by surprise. The number of files that are in default. They are under trained and Overwhelmed as far as the amount of loans that they're -- what's called the Loss Mitigation Department is being asked to review. So they have really done, they have taken a position that they are dealing only with the hottest flames that are out there, meaning those that are closest to losing in foreclosure. So they are ignoring the ones that they could save if only they would work on them earlier. So it's taking between six weeks and six months to get a response out of a lender whether or not they will work with the borrower.

Ted Simons:
And people have to be aware of that because a lot can happen six months to year regarding your loan.

Dian Drain:
Exactly.

Ted Simons:
Short sales. Talk us to about the legal ramifications there.

Diane Drain:
A short sales where a lender doesn't receive what he is owed. Again consequences can be taxes. Forgiveness of debt. The lender may ask the borrower to sign a promissory note for the difference between what the lenders receiving from the short sale. The borrower needs to be aware he's legally obligated to pay that back or he can be sued. The problem there is that he may not have that -- that promissory note is a legal obligation outside of our Arizona statutes, what's called the Anti-deficiency statute. So had he not signed a promontory note he might have been protected but once he signed it he's now exposed.

Ted Simons:
In terms of taxes, see if I got this right now, you sign for the loan. You sign the promissory note. You can't pay the loan. That is considered income until you sign the note. When you sign the note that's not considered income. But if you can't pay it, then all of a sudden it becomes -- comes back to you as income you are liable for it.

Diane Drain:
Right, it's called phantom income because you never really got a dollar bill in your pocket. But it is deemed income. The internal revenue code requires the -- that the lender file a 1099 showing you did have income. There has been some relief. The mortgage forgiveness act of '07 says if it was your principal residence for two of the last five years and you borrowed the money to buy the house or borrowed the money to improve the house, that there's a particular form called a 982 form you file with the I.R.S. showing this should not be deemed income.

Ted Simons:
For debt forgiveness act of '07 that has been extended has it not?

Diane Drain:
It has been. I believe going to '12 now.

Ted Simons:
As far that is that is concerned, what are the ramifications there? What -- how -- not ramifications. What are the requirements there for someone to be helped?

Diane Drain:
You can't have a secondary residence so this has to be your only residence. You had to have borrowed the money prior to January 1 of '08. Your income has to be such that you are 31% -- I don't have my cheat sheet with me but basically you can't afford the loan it what it comes down to. The result will be -- if first place it's an F.H.A. program. So your lender has the discretion whether or not to agree to the -- modifying the loan. If they modify the loan, then, they are to make it a 30-year fixed, standard, you know current interest rate. And there are some programs for first-time home buyers. There's $7500 up front of down payment, kind of a grace period or grace loan but it will be a loan you will have to pay back.

Ted Simons:
But in general, from what we are talking about here, I guess the lesson learned is, if you can, don't walk away.

Diane Drain:
Right, don't walk away without knowing what it is that can happen, what the consequences will be if you walk away. It may be ultimately you decide to walk away anyway because you can't afford to keep taking whatever money you have in savings and pay it into a black hole. So understand the deficiency issues. Understand the tax issues. You've got to see a certified tax specialist. Do not use a standard c.p.a. who doesn't understand taxes. I'm sorry, forgiveness of debt. So have the big picture in mind before you decide to walk away.

Ted Simons:
Yeah. Well, great information here, Diane. Thank you so much for joining us. We appreciate it.

Diane Drain:
Thank you.

Diane Drain:Real Estate and Bankruptcy Attorney;

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