1. Credit After Foreclosure, Bankruptcy, or
Short Sale
Presented By:
William Martinez, Small Business Counselor

2. Unanticipated Financial Hardship
Unexpected circumstances or events that make it difficult to
meet financial obligations.
Examples:
• Job Loss
• Unexpected Illness that causes loss of income or surge
in medical bills
• Family Status Change: Divorce, separation, or death of a
spouse
These circumstances can lead to loss of a home through
foreclosure or short sale and even bankruptcy.

3. Alternatives to Foreclosure
Loan Modification – Change in mortgage terms (i.e. interest rate, loan
term, principal reduction) in order to lower payment.
Short Sale – Lender agrees to a sale of your home for less than what
is owed.
Deed-in-lieu of Foreclosure – Transfer ownership of your property to
the lender in exchange for being released from the mortgage obligation.

4. Credit After Foreclosure, Bankruptcy, or Short Sale
How long after Foreclosure, Bankruptcy, Short Sale, or Deed-in-
Lieu before you can obtain credit to purchase a home?
According to Fannie Mae credit guidelines:
• Foreclosure
– 7 years from the date the foreclosure sale was completed as reported on the credit report or
foreclosure documents.
• Short Sale
– 2 years from the date the short sale was completed (limited to 80 percent loan-to-value)
– After 4 years, maximum loan-to-value increases to 90%
• Bankruptcy
– 4 years for Chapter 7 or 11
– 2 years for Chapter 13
• Deed-in-Lieu (DIL)
– 2 years from the date the DIL was executed
Extenuating circumstances such as job layoff, divorce, medical bills, etc., which led to
the foreclosure, bankruptcy, or short sale, can reduce the time period.

5. Deficiency Judgment After Foreclosure
Under certain circumstances, a lender may be able to get a judgment
against you for any deficiency between what was owed and what they
were able to recuperate in a foreclosure sale.
Is borrower liable for deficiency judgment after foreclosure?
Residential 1-4 units, Owner
Occupied
Non-owner Occupied or Other
Real Estate
Lender
Purchase
Money Loan
(non-
recourse)
Seller
Financed
Purchase
Money Loan
(non-
recourse)
Refinance (non-
purchase money
– recourse)
Lender Purchase
Money Loan
(non-recourse)
Seller
Financed
Purchase
Money Loan
(non-recourse)
Refinance (non-
purchase money
– recourse)
No
(if senior or
junior lien
holder)
No
(if senior or
junior lien
holder)
Yes
(if judicial
foreclosure)
No (if trustee
sale)
Yes
(if judicial
foreclosure)
No (if trustee
sale)
No
(if senior or
junior lien
holder)
Yes
(if judicial
foreclosure)
No (if trustee
sale)

6. Taxation of Foreclosures & Short Sales
Two types of taxable income can arise from a foreclosure, short sale, or
Deed-in-Lieu:
– Capital Gains
– Cancellation of Debt
The income is taxes differently depending on whether there was a
foreclosure, short sale, or DIL and whether it was a recourse or non-
recourse loan.
No taxation if cancelled debt is considered “qualified principal
residence indebtedness” under the Mortgage Forgiveness Debt Relief
Act of 2007.
Go to IRS.Gov for additional information.

7. Avoiding Probate
Probate is the court-supervised administration of a decedent’s estate.
Property subject to Probate:
– Property to which the decedent directly held title to at time of death
– Does not include property owned by contract, or which passes by operation of
law to another upon death.

8. Avoiding Probate
Property Not subject to Probate:
- Property held in trust
- Property held by decedent as a fiduciary or as trustee for another
- Property held in Joint Tenancy
- Property held in a multi-party account
- Property which is a life estate
- Property held as community property with right of survivorship
- United States Savings Bonds
- Transfer on Death Registered Securities
- Life insurance proceeds
- Retirement benefits payable to designated beneficiary
- Payable on Death (POD) bank account
- Employment-related death benefits
- Statutory benefits such as social security, veteran’s benefits, or worker’s
comp that have POD provisions
- Automobiles owned in beneficiary form
- Mobile-homes, commercial coaches, truck campers, floating homes

9. Avoiding Probate
When is probate administration not necessary?
- When spouse or registered domestic partner (RDP) dies without a will,
surviving spouse or RDP gets property through intestate succession
- Under limited circumstances, when estate is a “small estate”: the gross
value of the estate is $100,000 or less.
- When there is a valid will or trust

10. Property Successorship
The law of intestate (no will or trust) succession varies depending upon
whether the decedent was single or married at time of death.
Who gets the property upon death?
For single decedents (in order):
1. Children, equally. If a child is deceased, but had children, the child’s share goes to his or her
children.
2. If no living children, to grandchildren equally.
3. If no living grandchildren, to great grandchildren, equally.
4. Decedent’s parents, equally or to the surviving parent if one is deceased.
5. Brothers and sisters equally (half-brothers and sisters are considered the same as full brothers
and sisters) with provision that if any brothers or sisters are deceased, their share passes to their
children equally.
6. Grandparents, equally, or to surviving grandparent.
7. Descendants of grandparents, such as aunts, uncles, cousins
8. Descendants of pre-deceased spouse (step-children)
9. Parents or the surviving parent of a pre-deceased spouse

11. Property Successorship, Continued
Who gets the property upon death?
For single decedents (continued):
10. Descendants of the parents of a pre-deceased spouse
11. Next of kin or nearest relative
12. Next of kin or nearest relative of a predeceased spouse
13. If none of the above, to the State of California
For Married decedents:
All community property or quasi-community property passes entirely to the surviving spouse.
Any separate property of the decedent is distributed to the surviving spouse or domestic partner and
other relatives as follows:
1. Spouse or domestic partner and children: one-half to spouse or domestic partner and one-half to
one child if only one child. If more than one child, 1/3 to spouse or DP and 2/3 to children, equally
2. If there are no children or grandchildren, then ½ to spouse and ½ to decedent’s parents equally.
3. If no children, grandchildren, or parents of the deceased, then ½ to spouse and ½ to decedent’s
siblings, equally.
4. If no children, grandchildren, parents, siblings, nieces or nephews, then all of the separate
property passes to surviving spouse.

12. Questions?