Re: Criteria used to exercise the deficiency collection?
No one can say what an individual lender will, or won't do in a given circumstance.
Assuming the house isn't salvagable(sp?), you are looking at a $175k debt with a possible sell price of $135k. If the lender suffers a $40k loss through foreclosure, can they recover that amount through judgment/collection?
Bankruptcy can wipe out debts that cannot be paid, or reduce the amount to be paid to manageable levels. Lenders are aware of that, and they can't do much of anything about it if you choose to go that route.
Concurrent foreclosure and bankruptcy aren't really a good thing for your credit report, but that's kind of why bankruptcy exists, to allow you a fresh start.
1099's for forgiven debt aren't necessarily a taxable issue. Borrower solvency is a key element, foreclosure and concurrent bankruptcy could be considered evidence of insolvency.
Try to sell the property, even if it's a short sale. If that doesn't fly, make the call on minimizing your losses.
Hope that helps.
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