Short Sale & Retirement Accounts

I bought a condo in Florida ( with two partners) for 700K, 3 yrs ago. Current value 350K, Partners have left.  My funds are exhausted. My assets are 401k and IRA plus equity in other investment property.  Is there any way to protect assets, in the event of short sale or deed in lieu?

George

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Hello George,

A June 15, 2008 article by the Washington Post titled: “Where Short Sales Stumble” suggested the following:

“If an upside-down owner must sell, even at the reduced price, he’s expected to take money out of savings, cash in the 401(k), borrow from the in-laws or otherwise pay off the mortgage.”

What?!?! The above is terrible advice!  First, the in-laws should keep their money.  Second, section 522(d)(12) of the bankruptcy code lists the following as exempt:

“Retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.”

And 522(n) exempts up to $1M for an IRA:

“For assets in individual retirement accounts described in section 408 or 408A of the Internal Revenue Code of 1986, other than a simplified employee pension under section 408(k) of such Code or a simple retirement account under section 408(p) of such Code, the aggregate value of such assets exempted under this section, without regard to amounts attributable to rollover contributions under section 402(c), 402(e)(6), 403(a)(4), 403(a)(5), and 403(b)(8) of the Internal Revenue Code of 1986, and earnings thereon, shall not exceed $1,000,000 in a case filed by a debtor who is an individual, except that such amount may be increased if the interests of justice so require.”

Since 401k and IRA accounts are generally exempt from creditors in bankruptcy and do not become a part of the bankruptcy estate, they should not be used to pay an upside-down mortgage, as the WaPo article dangerously suggested.  While it’s true that these retirement assets are listed on your short sale financial statement submitted to the lender; nevertheless, they remain yours. 

Now having written that, a debtor can not make contributions to those retirement accounts for the intended purpose of defeating creditors with pre-bankruptcy maneuvering.  And that brings us to the next subject - fraudulent conveyance - equity in other investment property you write?  You’ll need to beware of fraudulent conveyance.  

So, call me crazy but I see some short sale deficiency negotiations in your future!

Thanks for the questions and hope this helps.

Paul

This author is not an attorney and this information should not be considered legal advice.  Please consult an attorney for legal advice. 

(source=law.cornell.edu/uscode/11/522.html)

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