Q.           What is the automatic stay?
A.         The automatic stay is issued when a bankruptcy case is filed.  It immediately and automatically stops (“stays”) actions by creditors against you.  This includes not only collection letters and phone calls, but also foreclosures and lawsuits.

Q.           What is a “sold out junior”?
A.            A sold out junior is the holder of a note and deed of trust secured by real property that has been sold at a foreclosure sale by the holder of a note and deed of trust that is senior, i.e. recorded earlier on the property.  This results in the “junior” note holder creditor losing their security interest in the property.

Q.           After a foreclosure, can a sold out junior sue me?
A.           Yes.  The junior creditor’s deed of trust is now worthless because the property has been sold to satisfy the note and deed of trust of the senior creditor.  However, the junior creditor still holds a promissory note signed by the borrower.  The sold out junior creditor can sue the borrower for the full amount of the note.

Q.           Can a claim of a sold out junior be discharged in bankruptcy?
A.            Yes.

Q.           What is cancellation of debt (COD)?
A.          Cancellation of debt occurs when a creditor’s debt is cancelled either voluntarily such as through a settlement or involuntarily such as through a foreclosure or short sale.

Q.           Can COD result in an income tax?
A.            Yes.  Many people have been shocked to find out that after going through a foreclosure that not only is the real property lost, but the IRS now has an income tax claim for cancellation of debt.  The same can be true for a short sale.  The determination as to whether COD income applies is technical in nature.  Your accountant should be consulted before a foreclosure or short sale.  There are steps you can take before such sales to avoid COD, but not afterwards.

Q.           Is it true that a bankruptcy filed before a sale that would result in COD income tax would avoid the tax, but a bankruptcy filed after such a sale would not?
A.            Yes.  A bankruptcy before a foreclosure or short sale avoids the COD tax.  A bankruptcy filed after the sale does not help with a COD tax.  You can’t “un-ring the bell”.  Any COD tax would not be dischargeable in a subsequent bankruptcy filed within 3 years of the assessment of the tax.  Remember, after is too late.