FORECLOSURE DEFICIENCIES
This is a general outline provided by ROBERT J. ADAMS & ASSOCIATES. Offices in Chicago and Waukegan, Illinois
The primary practice of ROBERT J. ADAMS & ASSOICATES is Chapter 7 and Chapter 13 Bankruptcy.
When you buy a home financed with a mortgage you give the mortgagee two (2) things:
- A lien on the home; and
- A Promissory Note (I promise to pay the mortgage company a certain amount of money)
WHAT HAPPENS WHEN A HOMEOWNER LOSES THEIR HOUSE IN FORECLOSURE
- The mortgage company gets a money judgment;
- The home is sold at a sheriff’s sale (more technically a “judicial sale.”)
- Anyone can bid at these sales;
- The successful bidder can pay more that i. the judgment amount, ii. the judgment amount; or iii. something less than the judgment amount.
When the successful bidder pays less than the amount of the judgment there is what is called a deficiency. For example: the judgment was for $300,000 and the successful bidder (usually the mortgagee) bid $250,000: there is a deficiency of $50,000.
With few exceptions the homeowner loses his/her/their house and still owes money.
WHAT ABOUT SECOND MORTGAGES (OR HOME EQUITY LOANS)?
Usually 2nd mortgage companies do not bid at sheriff’s sales: you owe the full amount of the balance plus continuing interest.
WHAT TO DO?
The most practical solution is to file Chapter 7 Bankruptcy. Then you owe nothing.
If you have to file Chapter 13 for some reason the deficiency amount becomes a general unsecured creditor. Most unsecured creditors are paid a small dividend in Chapter 13.
LIMITATIONS ON DEFICIENCY JUDGMENTS
- FORECLOSURES COMPLETED BEFORE 2014. Most homeowners were protected against deficiencies from 1st mortgagees; but, not 2nd mortgages;
- You were never served by the mortgagee when it fore closured. They should not get a money judgment.
- If you had filed Chapter 13 but the mortgagee was able to get of it (with few exceptions) they can’t get a deficiency judgment.
- In the foreclosure you agreed to the foreclosure judgment and the mortgagee agreed that the judgment was payment in full.
- The mortgage company decides not to pursue its money judgment. But when they cancel the debt they are required to issue IRS for 1099-C. This becomes a “phantom income” for the amount canceled. You then owe income tax on the amount of the canceled debt.
- To determine if the cancelled debt is taxable or not you can go to the IRS’ website: Topic 431 – Canceled Debt – Is It Taxable or Not?. If you qualify you can fill out IRS form 982.
- Even if one has the debt cancelled and you successively avoids the tax man there is a secondary danger: junk debt buyers. Junk debt buyers buy canceled debts for pennies and try to collect the debt. It can be a nightmare.