"Just walking away"

4

4walls4me_IHB

New member
<p>Hi Guys,</p>

<p>Oftentimes I read on here about irresponsible borrowers that "just walk away" from their properties. Can you really do that? Does the bank just forgive the difference between what you owe and what they sell? Why wouldn't they try to collect from you if you have assets or a job? Does it kill your credit at least so you can't buy again? Isn't there some consequence? If not, I'm mad!!!! </p>
 
You sure can. If it's a non-recourse loan the bank is limited to the property for payment, i.e., can't go after you for the difference. Purchase money mortgages are non-recourse by law. If you refinance, then your loan becomes recourse and the bank can come after you. Either way your credit is going to be damaged. And you may find yourself owing a lot of money to the IRS because forgiveness of debt is considered income.
 
4walls4me,





Everything marty said is true. However, there is <a href="http://housingbubblecasualty.com/update-an-fb-situation-14-months-later/">anecdotal evidence</a> that people have not been getting issued 1099s from the banks -- at least not yet. Personally, I would be surprised if these people were not pursued to the ends of the earth for every last penny, particularly given how large the sums are. Perhaps the banks are not geared up for collections just like they are not geared up to handle REOs. Give it another year and hopefully we will have some good stories about banks taking every asset an FB has. So far, nothing...
 
If I may add ... Non-reception of an 1099 does not absolve responsibility for cap gains owed on forgiven debt.
 
<p>marty is correct.</p>

<p>purchase money loans can be abandoned w/o recourse. If you sucked out cash the bank can come after you. I can tell you that itis highly unlikely that they will. Banks are going to be slaughtered with foreclosures and it would cause a seizure of the legal system.</p>

<p>If the bank sells the house for less than what you owe, and they forgive you of the difference, you'll have to pay the IRS taxes on that amount</p>
 
My line of work has nothing to do with real estate, and I have never been in the situation, but I have heard there is normally a lag between having your house foreclosed and getting a 1099. The reason is because the bank tries to mitigate the loss and they won't know how much to 1099 you for immediately.
 
<p>The year in which the cap gains taxes are owed on forgiven debt is not determined by the date on which a 1099 is filed or received. Tax liability is incurred upon forgiveness of debt and the issuance of a 1099 is irrelevant. The taxpayer is liable for tax incurred and penalites and interest will accrue even if the taxpayer receives the 1099 late or never receives a 1099. Notice of forgiveness of debt is not neccessary for tax liability. Logical or not, the taxpayer is responsible for the correct amount of tax and proper filing, no matter what the bank does. "I didn't know" does not usually save one from penalties and interest.</p>
 
awgee,





At what point has the FB incurred a liability? When they move out and don't pay off the mortgage, the bank will still consider it a debt it is owed. In theory this debt can live indefinitely. When would the FB know the bank has written off this debt unless they receive a 1099? Would they be responsible for paying taxes on debt forgiveness in the year they move out even though the bank may not have forgiven it yet? I am just trying to understand the mechanics here.
 
<p><em>If the bank sells the house for less than what you owe, and they forgive you of the difference, you'll have to pay the IRS taxes on that amount</em></p>

<p>I thought you only got the 1099 if you did the short sale. If the bank takes the house, that eliminates the debt "at par". That actually makes sense to me because once the bank takes the house, you no longer have any control over the resale value hence, making you responsible for the difference is a form of double jeopardy. i.e. the bank liquidates the house to the friendly neighbor investor for 30 cents on the dollar and send you the 1099 when an at market reale maybe would get 60.</p>
 
<p>Having no actual knowledge...I would guess the tipping point on a non-recourse is when you are in default, have no intention to repay and give up possession of the house. </p>

<p>I wonder though, since you have to give back the house, shouldn't that reduce the amount of debt forgiven? Taking it one step further, if the bank buys it back for the amount of the loan, didn't the bank recover the full value of the loan, and thus no debt was actually forgiven? [edited, or what NSR said...I guess I should read all the way to the bottom!]</p>

<p>But, in an 80/20 situation, if the second (20) gets wiped out, I could see that as counting as income.</p>

<p>Interesting...</p>
 
NSR -- I don't think it works that way. If it did, you could always avoid forgiveness of debt income simply by giving up whatever was secured by the debt. My guess is that whatever the bank sells the house for is considered fair market value unless you can prove otherwise. If the bank sold the property at auction, it would be very difficult to prove the highest bid wasn't fair market value.
 
<p>Keep in mind, purchase money mortgages in California are non-recourse loans. If Countrywide is going to start generating 1099s after sitting on a home for over year with it priced for more than they took it back from the borrower for after selling for a bigger loss this winter. There will be some interesting, and I think valid, discussions about whether the bank lacked due diligence in liquidating the property in a timely manner.</p>

<p> </p>
 
I think the form just says fair market value. So it's up to the taxpayer to write in the fair market value and pay the tax on the difference between the forgiven loan and the fair market value at the time the loan was forgiven. It doesn't matter that the bank waits to sell the property -- the date the loan was forgiven is the date the income becomes reportable. The bank's diligence has nothing to do with it.
 
I hate to do this, but I have to agree with Marty on most points. On the exact mechanics of how and when the debt is considered forgiven, I don't know. I only know the tax liability is incurred on the amount of debt that is forgiven and in the year the debt is forgiven. And the amount on the 1099 is usually used as the forgiven amount, and I think the bank may include their expenses in that amount. But, my original point is that tax liability is incurred on forgiven debt and if one does not receive a 1099, the taxpayer is still liable for the tax, and the IRS will assess penalties and interest if the IRS figures out that tax has not been paid. Don't cha love that "if"?
 
<p>As a side bar to this do you see walking a way as a problem when housing prices are done adjusting downward.</p>

<p>Say I bought in for 800k and in two years my same home is only worth 550k do you think people will just walk away?</p>

<p>I am not talking about people with ARM'S or an exotic loan. Standard fixed rate just upside down in your home.</p>

<p> </p>
 
<em>"Say I bought in for 800k and in two years my same home is only worth 550k do you think people will just walk away?"</em>





Yes, It happened in the 90s, and I think it will be epidemic this time. Financially, it makes no sense to bust your ass to make the payments on an $800K mortgage when a property is only worth $550. Morally, making the payments is the right thing to do, but most people will sell their morality for much less, particularly if they are avoiding a lifetime of being a homedebtor.
 
<p>IR,</p>

<p>I know you don't believe it, but some people put something down!</p>

<p>If they did, it would be less damaging to them overall to wait it out.</p>

<p>It would take the person in your example many years before they could buy again anyway. </p>

<p>What would they really gain? </p>
 
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