Q. A friend lost his job and is in foreclosure on his house. Can the lender come after him for the balance of the loan? I heard that state law protects home buyers. Is that true? N.H.
A. Whether your friend can be pursued for the balance of the loan depends entirely on what type of loan he has. In California, a "money purchase" loan--that is, a loan secured to purchase a house--is a non-recourse loan. That means the bank has no recourse against the borrower's other assets. The lender can only go after the asset (the home) that secures the loan.
However, if your friend refinanced his loan, he no longer has a money purchase loan and could be subject to proceedings that would allow the bank to attach his other assets to pay off the debt.
Will the bank actually do that?
Practically speaking, lenders are no more anxious than you are to be saddled with a huge portfolio of depressed real estate in a soft market. Not only do they face loan losses, but it costs them money to maintain and resell the properties they take back from their borrowers.
In an increasing number of cases, lenders are willing to work out a solution with a potentially defaulting borrower. In these cases, the lender will accept a "deed in lieu of foreclosure" that essentially gives back the property to the lender without going through a formal foreclosure procedure.
In some cases, the lender will even agree not to notify credit-reporting bureaus of the transaction, sparing the borrower a blow to his or her future credit-worthiness.
Before your friend walks away from his house, he should try to secure a deed in lieu of foreclosure. Your friend could strike a deal to help the lender sell the home. Your friend would agree to maintain the home and show it to potential buyers in exchange for permission to continue living there.
Separate Withdrawals From Pension Accounts
Q. I am getting conflicting opinions on mandatory withdrawals from 403(b) annuities and IRAs. At age 70 1/2, must you take the required withdrawal from each account separately, or can you make a single withdrawal from either one?-- M.G.
A. You must take your disbursements separately from each type of pension account, making one withdrawal from the annuity as well as one from your IRA. If you have more than one IRA, you may select the account from which to make your total mandatory IRA withdrawal. However, annuity withdrawals must each be made separately if you have more than one of those types of pension plans. Under no circumstances can you mathematically combine your various plan account balances and make a single withdrawal.
Stock Value After Firm Sold Depends on Deal
Q. I bought 250 shares of a software company five years ago. It was my very first time in the stock market. Now I have gotten a letter from the company saying that they are being acquired by another company and that all outstanding shares will be purchased by that company. What happens if I choose not to sell? Will my shares lose their value?-- E.Y .
A. If you choose not to tender your shares at the time of acquisition, what happens to your stock depends on the terms of the deal between the two companies. Remember, these companies are theoretically run as a democracy; any deal must be approved by the majority of the shareholders, and the majority does rule. (However, it is fair to observe here that directors and senior management often compose the controlling majority of shareholders, so any deal struck by management is, in effect, approved by the shareholders as well.)
What choices are open to a dissenting shareholder? In some cases, the deal could permit shareholders to exchange their stock for a commensurate amount of shares in the acquiring company, an offer that spares an immediate tax obligation in the event the shareholder's stock has greatly appreciated. However, this option is not always available.
Another possibility is that the acquiring company will allow uncooperative shareholders to remain in a kind of corporate limbo with their old stock. This last scenario is hardly desirable; you would have no effective market for your shares, and any dividends the shares once generated would end; eventually you would have to give in and redeem the old stock.
The bottom line is that you will eventually have to accept whatever deal the shareholder majority approves if you want to realize your investment in the stock.
Tax Liability on Note Carried on Rental Sale
Q. A few years ago, we sold a rental property through a 1031 exchange. We also carried a note on the property. Now the buyer wants to pay off the note balance. What is our tax liability?-- E.S.V .
A. A lot depends on the terms of the sale. If the money you lent the purchaser had been fully taxed at the time of the sale--this assumes the loan was not made with proceeds from the exchange transaction itself--then you would have no tax obligation because the payoff is merely a return on your after-tax principal. (Of course, you are already paying taxes on any interest the note carries over the loan term.)
If, however, your deal was a partial installment sale and a partial exchange--and if it was, you should know it--you would be liable for taxes on that part of the payoff that represents untaxed, deferred gain.