Foreclosure and LLC in California

[Ann North]

I think this Forum might be a better place to help. I would like any advice on our rental property condo/townhouse in California that is in Pre-Foreclosure.

It's complicated and I'm trying to figure it all out.

-The property is Pre-Foreclosure with NOD (no sale date) with an offer from a new tenant who wants to cure and do lease option to buy. I'm nervous because I'm in another state. My head is spinning from it all. They are in love with our house. Our other tenants were great and moving out after long-term lease but didn't pay full mortgage amount (which is how we got behind in addition to a layoff) but things are better now.

-If they cure default, that will count as income? Even if goes directly to bank? I hired a lawyer to help draft the lease. Can they just pay bank directly? I'm trying to get bank to negotiate on lump sum reinstatement amount and they won't. The Foreclosure Attorney tells me to talk to the Lender and the Lender (who is very nice) tells me to talk to the Foreclosure Attorney.

-What are the Foreclosure implications in California on a rental property? 

-A Lawyer advised putting the property into an LLC because it wouldn't hurt our credit as much, is that accurate?

-Should I form an LLC and put property into it? What are the tax implications? 

-If property is already on our credit does it show as transferred to LLC - paid off?

-The Lender says we can apply for a Loan Mod again. We were denied the first time because they viewed it as an investment property (even though it was our home and we had to rent it out) and on income vs. debt. Perhaps this would be an option.

We want to

A) Not end up Owing Money

B) Not have our credit be destroyed with a Foreclosure or Short Sale- we have to buy a house again in our new state

C) Have the Tax damage minimized

D) Not Make Situation worse or more complicated

E) Would like to hold onto house as rental because it's appreciating in SoCal

Thank you!!!