Concentrate on a short sale for home #1. You could knock off close to 40K on the HELOC. As for Home #2, looks like short sale would not help.. you’ll have to take the full 25K in 1099s. The bank holding the HELOC may drag its feet on house #1.
Make sure you don’t sign any further loan documents as a condition of short sale on #1. This could trap you. Take the approach that immediate short sale will limit losses. This is also where a good loss mitigation person might help. Sorry, I’m not one..
PS: You may want to talk to both a tax attorney and a loss mitigation person. The former for specifics on the neg-am loan and recourse. The loss-mit for negotiating the short sale. Time is critical.
