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HELOC and Bankruptcy

Our Riverside office location helps many people in the Inland Empire with real estate challenges they are facing due to the real estate bust of last decade. Whether you are facing foreclosure or short sale, a bankruptcy can help protect you from resulting deficiencies and penalties. When you have a Home Equity Line of Credit or HELOC loan on a home, a foreclosure or short sale may leave you with a deficiency amount that can still be collected on. If the left over debt from a foreclosure or short sale is not cancelled, your outstanding debt from a Home Equity Line of Credit or 2nd home loan can be pursued as unsecured debt after you lose your home. With a bankruptcy, the deficiency amount can be discharged after the loss of a home. You will be protected from any future collections and the debt will be essentially eliminated through discharge in bankruptcy.

Another concern after a short sale or foreclosure is the tax liability of cancelled debt. If you lose your home through short sale or foreclosure and the bank cancels debt that was attached to a home via Home Equity Line of Credit or a 2nd loan, you will be issued a 1099 showing the cancelled debt as income. Since you owed the amount and the amount was cancelled, you earned the debt amount as income which cancelled the debt amount. So, you can expect to receive a 1099 form to report the cancelled debt as income for the upcoming tax filing. For the amount that you received a debt cancellation, you will be liable for income tax at the rate of income tax that you qualify for in the next tax filing. So, if you make $40,000 per year and you receive a 1099 for a 2nd loan that was cancelled where the amount of debt was $100,000, you will be liable for income tax of $140,000 total. This may push you into a new tax bracket. For income of $140,000, the estimated income tax rate is 28%. The estimated tax liability for $140,000 of income is $39,200. If you are not prepared to pay this type of tax liability, you may need to consider bankruptcy to protect yourself from tax liability after a short sale or foreclosure. You can ask you accountant to give you details on what you may be liable for when you do go into a short sale negotiation or foreclosure.

Bankruptcy will allow you to prove your insolvency during the short sale or foreclosure which will allow the forgiveness of the income tax liability of any cancelled debt. Whether the bank issues you a 1099 or not, you can prove your insolvency by showing that you qualified for bankruptcy and filed a bankruptcy which can allow your accountant to eliminate any 1099 income tax that you may be liable for without a bankruptcy.

To get more information on this or any other matters regarding bankruptcy, contact us at (855) 257-7671. We have offices in Riverside, Tustin, and La Mirada to serve you.

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