I can't afford to make my house payments anymore. What are my options?
I have a big problem with my house. I bought a house more then 4 years ago, but now I can't afford to pay my payment. My question is what is the best way to handle this (short sale or foreclosure)? If I foreclose do I have to pay something like 1099 IRS? Thank you very much for helping me.
Editor’s note: See the Bills.com resource Home Affordable Foreclosure Alternatives Program for an updated discussion of deeds in lieu of foreclosure and short sales.
Generally speaking, allowing a home to go into foreclosure is not a good idea for consumers, as you will lose any equity that you have built in the home and take a terrible credit impact. In some cases, though, consumers have no choice but to allow a foreclosure to proceed.
The easiest way that you can free yourself of this obligation without owing a deficiency balance is through a "short sale," in which the mortgage holder agrees to accept less than the balance owed on the mortgage at sale to prevent foreclosure. The lender would much rather see you sell the property than be forced to take the property through foreclosure, as foreclosure is a costly and time-consuming process. You should contact your mortgage lender to discuss what it can do to assist you in selling the property through a short sale, and what are its procedures and requirements. Explain to the lender that you cannot afford your mortgage payments, and that you need to sell the property through a short sale to prevent foreclosure.
If the lender will not allow you to sell the home for less than you owe, you may have no choice but to allow the home to go into foreclosure, although foreclosure presents major problems. Foreclosure auctions tend to bring significantly less money than a normal sale would bring. If the sale brings less than the amount owed on the loan, the remaining balance of the loan may be considered a deficiency balance. Clearly foreclosure is not an attractive option, and should be avoided if at all possible.
If you have no choice but to allow foreclosure, you may be able to mitigate the negative impact of a deficiency balance by filing bankruptcy. Generally speaking, deficiency balances are treated like any other unsecured debt in bankruptcy, meaning they can be wiped clear by Chapter 7, and repaid over time through a Chapter 13. If your lender will not allow a short sale, you should consult with an attorney to discuss the legal implications of foreclosure and bankruptcy before you decide how to proceed. No one wants to file bankruptcy, but you may find that bankruptcy is the best solution to your problem if the mortgage lender will not allow you to sell the home through a short sale.
Regarding your question about the 1099, the IRS treats a foreclosure as a home sale, with any forgiven debt treated as regular income. Reporting a gain or a loss on the sale/foreclosure will depend on whether you are personally liable for the debt (which is normally determined by state law where the property is located). There are exemptions and state laws to take into consideration as well, so you should consult with a qualified tax adviser or tax attorney in your state and find out how they apply to your specific situation.
I will provide you with a links that should help educate you on foreclosure, taxes, and instructions on 1099-A forms. This may help you to head into your meeting with your tax adviser or attorney with some understanding of the basics involved.
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