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Monday, January 05, 2009

Short Sale, Long Consequences

Short Sale, Long Consequences: A story about divorce, foreclosure and the IRSIt is August 2008 and I have been divorced for two years now. What a two years it has been. Left with nearly $15,000 in credit card debt by my reckless and deceitful ex-husband, and just out of graduate school working part-time jobs to get by, it seemed like I would never catch up. Oh, and there is the deadly “foreclosure proceedings begun” on my credit report, which I’m told will be there for the next seven years. Nonetheless, it is August 2008; I am divorced, happy, and free, with a new love in my life, and more than two thirds of the debt paid off. I am able to go off the debt management program that has helped me reach this goal. I plan, and take, my first vacation in more than five years.

What do I come home to? A notice and bill from the IRS that they are increasing my 2006 reported income by more than $5,000, meaning I owe them about $800, because my ex and I sold our foreclosed house in a short sale more than two years ago.

Just when I think life is getting better, something surfaces, something bites my (thankfully, tanned) backside.

Of course, my first reaction is that this is an injustice. For one, the mortgage company (since gone bankrupt itself) never told me that I would be liable for claiming the waived debt as income, and never furnished me with a 1099 form. (In a recent phone call, their rep claimed they sent it to my ex, logical as he was the primary borrower.) For another, there is the sting of personal injustice: my ex had let the home fall into foreclosure behind my back. I still don’t know what happened to all the money that was supposedly going towards mortgage payments, thousands and thousands of dollars. (Of course, I do have my suspicions, most of which involve my ex’s internet affairs, substance abuse, and sending money to his con-artist brother in Europe for weird and always unsuccessful business ventures.)

The irony is, it was me who decided to file taxes separately for 2006, although we were technically still married for half of it, because I didn’t want to be associated with him any longer, even in the eyes of the IRS. If we’d filed jointly, he’d now be liable for half the short sale income. In fact, I might even be eligible for an IRS protection called “Innocent Spouse,” that waives the liability of a spouse when debt or income has been concealed. (He never shared the 1099.) As it is, however, two tax professionals and the IRS help desk in Providence, RI have convinced me that I am liable for the amount and will be held responsible, especially since my ex doesn’t seem to have filed income taxes at all for that year. As both of the accountants told me, “The IRS goes after the person with the deeper pockets.” It seems unimaginable but that person is me!

Ademola, another member of the www.DebtHelp.tv blog, wrote an entry about this recently. Bush and Co. have issued a special moratorium that currently prohibits taxing short sale amounts. It’s a good idea; with so many people facing foreclosure and crisis, this waiver is a welcome relief, I’m sure. After all, in my case the short sale amount, and subsequent tax, wasn’t thousands and thousands of dollars. In today’s market, however, large short sale amounts are a distinct possibility for those trying to sell their homes, especially if there’s a need to sell quickly. Read more about the moratorium here.

My story, though, is still a teaching story, I think. When you’re in financial and personal crisis, as I was when I negotiated the short sale, it’s easy to jump at the first relief without considering the long-term consequences. Don’t get me wrong, the short sale was probably still my best option, but I would have handled the taxes differently. I wish I had slowed down and asked myself questions, not yes/no questions, but open questions like: What do I need to know about a short sale?

That’s the thing about crisis: It seems like the time to act fast. Maybe, that’s really the time to slow down and do research. To ask an expert. To ask yourself: how will this affect me two years from now, when I come home from vacation, tanned, happy, and newly in love? How will this affect me when I’m almost-financially-secure again? How might this affect me in eight years or eighteen? In the moment when it’s hardest to think about long-term, we sometimes most need to.

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Monday, January 21, 2008

A Guerilla Approach to Fighting Foreclosure

I was digging through the WSJ.com archives for fun today, and came across an interesting article about Richard Davet, an Ohio native who was able to ward off foreclosure for 11 years. The part of the story I found most compelling was when a federal judge dismissed 14 foreclosure suits because the plaintiffs weren't able to prove that they in fact owned the mortgage when the lawsuit was filed.

During the housing boom of recent years, lots of lenders made millions by originating loans, then bundling them together and selling them on the secondary market. Eventually, it became difficult to know exactly who owned these mortgages.

So maybe a viable defense against foreclosure is, "Oh, so you wanna' foreclose on me? Well, I'm not moving, because I don't think you own my mortgage anymore. If you don't like it, take me to court and prove it!" With this defense, you'll probably end up on the street eventually, but it could buy a money-strapped homeowner many years in a mortgage-free home, time that can be used to save money and stabilize finances.

Here are some clips from the article:

"...Faced with the threat of foreclosure, many homeowners give up and abandon their homes.

Then there's Richard Davet.

He and his wife, Lynn, lived in a six-bedroom home in this Cleveland suburb for nearly 20 years when, in 1996, he was served with a foreclosure lawsuit. Rather than turn over the keys, he hit the law books. Flooding the courts with papers, Mr. Davet staved off foreclosure for 11 years, until this past January, when a county sheriff's deputy evicted the couple and changed the locks. They didn't make a mortgage payment the entire time..."

"...A former jewelry-business owner, Mr. Davet and his wife, a former graphic-arts tutor, bought their home in 1978 for $150,000. As its value increased they borrowed against it. They made their mortgage payments, but on one loan, they allegedly made payments late -- 90 times, according to NationsBanc Mortgage Corp., which assessed the couple some $4,000 in late fees.

After the Davets for two years refused demands to pay the late fees, during which NationsBanc began refusing to accept their regular mortgage payments, the company sued for foreclosure. At the time the couple still owed $80,000 in principal, plus an additional $160,000 on a second mortgage on the home. Mr. Davet insists the late fees were erroneous -- he points to a deposition in which a NationsBanc employee conceded that the company couldn't back up its claims for a chunk of the fees. So he began his full-time crusade in the courts to keep his home.

He started with the help of lawyers, but those arrangements didn't last. Dan Dreyfuss, who represented the couple when the case was filed, called Mr. Davet's strategy "a recipe for how to confound the courts." He quit after Mr. Davet filed a motion to disqualify a judge against his advice. Mr. Kalk eventually sued Mr. Davet, successfully, for unpaid legal fees.

On his own, as a "pro se" litigant, Mr. Davet was undeterred. Four times a week he went to Case Western Reserve University School of Law to study legal writing and case law in its library. His briefs were angry and colorful, including football analogies and an aside on Enron Corp.

Among his maneuvers: asking a judge to arrest NationsBanc's CEO for initiating a "sham" proceeding against him because the company claimed in error that it owned his loan. (The judge dismissed the request.) He later sought to disqualify the judge because she had accepted campaign contributions from real-estate developers, whose Beachwood developments Mr. Davet had publicly protested before the foreclosure litigation. When he didn't win that motion, Mr. Davet sought to disqualify the judge who had dismissed it. He appealed at every chance he could, which bought him extra years in his home..."

"...The house was later sold to another family for $410,000.

The eviction finally happened on a snowy day in January of this year. Don Saunders, who lived three doors down from Mr. Davet and is a trustee of the neighborhood association, says it came as a shock in the upscale area.

Mr. Davet continued to try, unsuccessfully, to get the federal court to agree that the state judgment was invalid. Then, a possible lifeline arrived this past October, when a federal judge in Cleveland, Christopher A. Boyko, dismissed 14 foreclosure suits because the plaintiffs that brought them couldn't prove they owned the mortgages when the suits were filed.

Such a problem can occur when mortgages are turned into securities and sold to investors. The companies involved in the transaction may not have checked that each mortgage was legally transferred, or "assigned," to the new owners. In essence, the originating lender continued to legally own the mortgage -- and would thus need to be the plaintiff in a foreclosure suit. In Mr. Davet's case, however, the mortgage, which was not securitized, changed hands multiple times and wasn't actually owned by NationsBanc until three years after the company filed suit.

Other judges have since followed Judge Boyko's lead. The Ohio attorney general has asked numerous judges to dismiss or delay foreclosures based on similar grounds.

Earlier this month, Mr. Davet filed a second federal appeal, this time citing the Boyko ruling, which he believes he inspired. It's unclear whether the latest salvo will work. If it doesn't, Mr. Davet says, he will set his sights on the U.S. Supreme Court..."

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