A street in Murietta CA has 5 flipped houses going down the tubes. Meanwhile the Alfred E. Newman of flipping is losing another house.
The currently imploding real estate market in formerly hot markets isn’t just producing pain for the flippers. Lots of people depend on real estate for their jobs. Builders, banks, electricians, plumbers, appraisers, inspectors, real estate brokers, as well as home supply, furniture, and gardening stores are just a few examples. So, when the foreclosure rate rises, and it is, the collateral damage can be profound.
The dreams, hopes, and plans of many will be cratering along with the bursting bubble. It’s the boom-bust cycle of capitalism; greed, stupidity, and cluelessness mixed in with fraud and predators looking for road kill. Remember, behind the lists of foreclosed homes are people who are getting crushed by debt. And no, they can’t just walk away from it as the recent bankruptcy laws preclude them from doing so.
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Absent a judicial foreclosure, I don’t see how the change in the BK laws come into play. As a lender you either get your money from the security or you get it from the debtor, but not both. Every creditor always goes for the property, which the debtor loses, but the foreclosure wipes out the debt.
Or did I miss something when I blinked?
Under the new bk laws, if a homeowner loses their home and say the bank sells it for a 100k loss, they can come after the former owner for the rest. So no, the foreclosure does not necessarily wipe out the debt.
Plus, the new laws make it much harder to do a bk. It’s not a given that you can do it.
The IRS can also treat the difference between the buy and sell price (even if the sell is less) in a foreclosure as income and thus it is taxable.
Two NY Times articles
1
Under the revised law, debtors who earn more than the median income in their state and who can repay at least $6,000 of their debt over five years will no longer be able to have their debts wiped out for a fresh start under the more generous provisions of Chapter 7 of the bankruptcy code. Instead, they will have to seek protection under Chapter 13, which requires a repayment schedule.
2
[The new law] requires debtors to provide an estimate of their income by taking an average of their most recent six months’ earnings before they can file under Chapter 7. Debtors with higher incomes are to be kept in bankruptcy status for several years, to pay off their debts.
The new law also requires every individual to undergo credit counseling before filing for bankruptcy protection. “It’s not right to make people who lost everything go through a course about how to manage their finances,” Mr. Botes said.
The law has stiffer requirements as well for what records must be produced by the debtor.
I don’t see how the bankruptcy system is implicated unless the debtor files. BK laws shouldn’t be preempting local laws governing secured transactions, and the laws in California and most states prevent what you’re suggesting (i.e., no difficiency judgment against the debtor when the lender forecloses on the security). There can be tax implications, of course, but there’s nothing new in that. So I’m still at a loss to see where the problem is unless the homeowner has other debts and has sought BK protection.