Is it better to bankrupt a home or let it be foreclosed?

Answer 1

I suspect you need some help in really understanding the terms your using...a house doesn't go bankrupt...the person does....Foreclosure doesn't completely extinnguish the debt if enough money to pay it isn't received from the sale. This may help. New IRS FAQs address problems of taxpayers who lose their homes through foreclosure

IR 2007-159

IRS has announced in a news release that it has a new frequently asked questions (FAQs) section on its website devoted to taxpayers who lose their homes due to foreclosure. It also reassured homeowners that while mortgage workouts and foreclosures can have tax consequences, special relief provisions were in place to "reduce or eliminate the tax bite for financially strapped taxpayers who lose their homes." Background. Gross income generally includes "all income from whatever source derived." (Code Sec. 61(a)) This includes income from the cancellation of debt (COD income). (Code Sec. 61(a)(12)) Under Code Sec. 1001(a), gain realized from a sale of property equals the excess of the amount realized over the taxpayer's adjusted basis in the property. The amount realized from the sale or other disposition of property includes the amount of liabilities from which the transferor is discharged as a result of the sale or disposition. Where the debt is recourse, the amount realized is the property's fair market value (FMV). Additionally, the debtor also realizes COD income to the extent the debt discharged exceeds the property's FMV. (Reg. § 1.1001-2(a)(1), Reg. § 1.1001-2(a)(2), Reg. § 1.1001-2(c), Ex. 8) A debtor is treated as having sold or exchanged property when he transfers it to his creditor in discharge of his debt. This applies whether the property is transferred as a result of agreement between the parties or as a result of a foreclosure proceeding. (Rev Rul 90-16, 1990-2 CB 12) Thus, if a home mortgage is recourse (and virtually all will be in this category), the actual or deemed sale of the property may generate a gain or loss and discharge of debt income. The discharged debt may be excluded from income under Code Sec. 108(a)(1)(B) if the taxpayer is insolvent.

COD income portion. Where a home is lost due to foreclosure, IRS's FAQs say the COD income equals the excess of the total amount of debt immediately before the foreclosure less the FMV of the property from box 7 of Form 1099-C (Cancellation of Debt). Determining exactly what the FMV of the property is may not be an easy task. If the taxpayer surrenders his property to the bank in exchange for cancellation of debt in a foreclosure sale, the FMV will be the sale price. However, if the transfer is in lieu of foreclosure and the bank sells the home shortly thereafter, the taxpayer will have to find out what the actual selling price of the property. One of the FAQs suggests that taxpayers who don't agree with the information on a Form 1099-C to contact the lender and get it to issue a corrected form if the information on it is incorrect.

Gain from foreclosure. Where a home is lost due to foreclosure, IRS's FAQs say the taxpayer has gain to the extent that the home's FMV exceeds his adjusted basis. This gain may, however, be excluded under the up-to-$250,000 home sale exclusion under Code Sec. 121 if a 2-out-of-5-year ownership and use rule is met ($500,000 for joint filers meeting certain conditions). Gain on a home sale may be partially or completely protected by the exclusion under Code Sec. 121(c)-even if the 2-out-of-5-year ownership and use rule is met-if the sale is made due to a change in employment, health, or "unforeseen circumstances." In its FAQs, IRS does not say whether it would treat the foreclosure of a home as an "unforeseen circumstance." Illustration: A borrower bought a home in August 2005 and lived in it until it was taken through foreclosure in September 2007. The original purchase price was $170,000, the home is worth $200,000 at foreclosure, and the mortgage debt canceled at foreclosure is $220,000. The borrower would have $20,000 of COD income and $30,000 of home sale gain (which may or not be eligible for the Code Sec. 121 exclusion). The COD income may be excluded under the insolvency provisions. For example, if the borrower was insolvent at the time of foreclosure-his liabilities totalled $250,000 and his assets totalled only $230,000-the $20,000 of cancelled debt would be excluded. ("Questions and Answers on Home Foreclosure and Debt Cancellation," FAQ 5)

Loss on home sale. If the taxpayer's adjusted basis in the home exceeds the FMV of the foreclosed home, he would have a loss that's not deductible. ("Questions and Answers on Home Foreclosure and Debt Cancellation," FAQ 4) Nonrecourse loan. It's rare for a home mortgage to be nonrecourse (the borrower isn't personally liable for repayment). If a homeowner whose home is foreclosed was fortunate enough to have one of these mortgages, he will not have COD income. However, he may have gain from the deemed sale of his residence. ("Questions and Answers on Home Foreclosure and Debt Cancellation," FAQs 2 and 3) Other relief. Without getting into specifics, IRS urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to set up a payment agreement with IRS. ("Questions and Answers on Home Foreclosure and Debt Cancellation," FAQ 7)

Answer 2

You should bankrupt. You'll have to start over in your life and also pay back the money, but if you forclose, it will be the same because the bank will end up with the house anyway. You need to pay your bills, buy cheaper things, set limits and stop trying to live like you can afford it when you know you can't! Who care's if you don't have what everyone else does? Atleast your life will be less stressful, and if your children are the reason because you give them what they want then stop. It's hard to say know but you'll be teaching them a better way in the long run if you teach them to spend money wisely. You don't want them in this same situation when they're adults, do you? I agree with a lot of the above and the sentiment is absolutely right, but just to make sure your clear: The house can't go bankrupt.....YOU DO...that involves everything you own. Letting it go to foreclosure does nothing more than selling it the most expensive way. The lender gets to recover all expenses and costs of having to foreclose...maintaining the proerty, fix it, legal fees, etc., and very likely gets much less that you selling it on the open market would. If enough money isn't generated by the foreclosure to pay the debt, you are STILL responsible for the debt, and the lender will come after you, (getting a deficiency judgment) for the rest. This is not to say you don't have options you should be exploring now....you seem to be doing this aware that your in a bad place and need to make things better....one is called a "deed in lieu of foreclosure" and is an arrangement made with the lender where they may, for your co-operation and avoiding all the legal hassel and basically just signing the home over, agree to take it as cancellation of the debt...all or part. Plus, you obvioulsy may have some other possibilities.