Foreclosure- How will it affect your future?
Foreclosure is a heart wrenching process. Thousands of people in northwest North Carolina resigned themselves to this reality after losing their jobs or finding their home values had dropped by 40% in just a year. They thought letting their home go would be the end of their problems. This is unfortunately not true. After foreclosure, your mortgage creditor can continue to make your life miserable. First your credit will be decimated for years to come. Second, your creditor will file a 1099 for the difference between what you owed and they received from the sale. Third, your lender can sue you for the difference between what you owed and they received from the sale. Fourth, if your loan was backed by the federal government (almost all are) the government can garnish your wages, tax refunds and even your social security.
Let’s talk about your credit first. Foreclosure is considered to be the worst type of delinquency on your credit report by most lenders. The lender thinks anyone who would release a home would not be a good risk for less necessary obligations like credit cards, cell phone purchases, or auto loans. So if you let a home go and never do anything about it, you are not likely to get a low rate on a loan anytime soon. If you file for bankruptcy, the foreclosure will no longer hold down your credit score. The foreclosure will show on your report, but any new credit you incur will push your score higher and not be held back by the previous foreclosure.
1099s being filed against folks were not a big issue until the last few years. Now the IRS requires any debt not collected to be filed as a 1099 and considered forgiven and taxable. You can rebut the idea that this debt forgiveness is taxable by filing a Form 982 with your tax return. The Form 982 has a fairly long formula to determine how much of the 1099 income you can exclude from your taxable income. Luckily for my bankruptcy clients, the first box on the form asks if your debt was discharged as a result of a Title 11 case. Title 11 is another way of saying bankruptcy. If you filed bankruptcy on the debt, there is no need to fill out the rest of the complicated form. You will not have to pay tax on the deficiency.
Before the real estate crash, you rarely heard of lenders suing people after foreclosure. Now with the property values still below that of those in 2008, lenders suing foreclosure clients are still pretty common. A lawsuit for the difference between what was owed by the homeowner and what the lender actually sold the property for would mean any new income or property purchased would then be encumbered or taken as collateral by the old lender. This means the painful act of losing your home may continue to be painful. Especially if you were to buy another home or inherit property. The new property would be encumbered by the judgment your foreclosing lender obtained after suing you. If you file for bankruptcy after the foreclosure, your lender cannot take any further action against you. You would not need to worry about a lawsuit popping up in the distant future.
You may not realize this, but most mortgages in the US are backed by the federal government. This means that the government will buy the mortgage if you default on your home loan. Luckily the government is not allowed to treat this loan like taxes. The government is treated like any other lender except the government has the ability to garnish wages, tax refunds and social security. I recently filed for a couple who had very little debt except for a $25,000 deficiency on an old mortgage. The government took their tax return for 3 years totaling more than $10,000 taken from the family. We filed bankruptcy and the couple kept their tax return last year and is on their way to discharging the debt completely.
I help people in Wilkes, Surry, Yadkin and Alleghany Counties with debt. If you would like to sit down and discuss your bills with me, just give me a call. My number is 336.526.2280.