The house had some signs of foundation settlement when he bought it which were chalked up to age, however it’s clear now that there has been more recent movement (some of this may have been due to an earthquake a few years ago) causing about 3 inches of settlement along this very small house.   

On a rehab I have anything that needs to be ordered ready to submit before I settle , I place the order the day of settlement .

So your debt is currently $3000 per month and your property earns you $1000 per month? 

It sounds like the Title Co. was not aware that the tenant prepaid rent and just prorated the current rent for the month of closing, so agree if they had no knowledge of it, would not have ever gone on the settlement statement as a credit to the buyer and they likely will not do anything post closing to help obtain those funds. 

I agree with @Shawn Ackerman I would start applying the cash flow to debt pay down.!

A little update with the bank, they are now telling me that they aren't even going to consider a settlement or a short sale unless the past due 14 contractual payments (around 8-10k) are paid.

.- Maintain proper records, such as contracts, settlement statements, and promissory notes.

It's debt you'd still have to pay back, but at least you will not touch one of those two amazing interest rates. 

Lenders usually determine whether properties are lendable based on the debt service coverage ratio. 

National debt versus GDP3.