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14 December 2012

After foreclosure do I owe money?

That depends. If your property is in Alaska, Arizona, California, Minnesota, Montana, North Carolina, Oregon, or Washington – the answer may be no. If it is located in any other state – yes, you may owe money. How much? It could be the difference between what you still owed on the loan and whatever the […]

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That depends.

If your property is in Alaska, Arizona, California, Minnesota, Montana, North Carolina, Oregon, or Washington – the answer may be no.

If it is located in any other state – yes, you may owe money. How much? It could be the difference between what you still owed on the loan and whatever the property sold for at auction. Some states allow borrowers to argue that the property was sold at fair market value in order to allow them sufficient “credit” for the repossession of the home. Others do not. If you have questions regarding a particular situation, please visit our forum and ask!

Now the good news: just because you owe money, doesn’t necessarily mean that it will be collected. In fact, based on our experience the debt is actually more likely to be written off by the lender. There is no way to predict how the lender will proceed, but below is some information regarding the possibilities.

If the lender pursues the remaining debt:

You will be personally served a Complaint and Summons. This is the initiation of a formal civil suit seeking a judgment for the amount of the principal balance, fees accrued and costs incurred to the lender during the foreclosure process. If this judgment is obtained, the debt collector may have the ability to place liens on the borrower’s property, garnish wages and/or levy their consumer accounts. In the event that the Defendant(s) cannot be found for personal service, most courts will allow for service by publication and/or mail. This is why it is a good idea to keep your mailing address updated with all entities involved in the foreclosure. You want to be aware of all action involving the property, foreclosure and any remaining debt.

These suits are extremely rare based on our experience. However, there is no way to predict if a lender will file suit. The suits we have seen have been filed against borrowers in a wide variety of financial situations. In our experience, it is more likely that a lender will pursue home equity line of credit (HELOC) accounts than purchase money loans. Also, we have seen more suits from Citibank, Wells Fargo and small banks and credit unions than other lenders.

Again, there is no way to predict whether or not a lender will eventually file suit – especially in states with longer statutes of limitations (the timeframe in which a lender can pursue the debt according to state law). The good news is that we have seen accounts settled even after a suit has been filed. Depending on their individual situation, some may also consider bankruptcy if they are facing a significant judgment.

If the lender sells the debt to a debt collector:

You will become subject to common collection tactics. This can include phone calls, account statements, demands for payments and requests to settle the account. After a foreclosure, a second mortgage is no longer secured by the property. It is essentially the same as credit card debt. Debt collectors often purchase these accounts at a significant discount and, as a result, we typically see these accounts settled for around 20% of the account balance. But again, there is no way to predict what will happen in a particular situation.

If the lender writes off the debt as a loss:

You are released from legal responsibility for repayment of the debt and will receive a 1099c in the January following the year in which the debt was cancelled. Under normal circumstances cancelled debt is considered taxable income for borrowers. In 2007, the Mortgage Forgiveness Debt Relief Act was passed. This excludes from taxation discharges of up to $2 million of indebtedness that is secured by a principal residence and was incurred as a result of the acquisition, construction or substantial improvement of the property. This means that homeowners who foreclosed on a principal residence and have never refinanced by taking out a home equity line of credit are not responsible for taxes on the difference between the loan balance and the amount the property is sold at auction. Unfortunately, the protections provided by this Act are set to expire at the end of 2012. Will the Act be extended? We don’t know yet, but there are currently multiple bills being considered that would do so.

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