Can I File Bankruptcy for Foreclosure Debt?
While foreclosure is, in itself, a harrowing experience, the debts left behind once the foreclosure is complete can cause you just as much stress as losing your home. If you owe a considerable mortgage debt after a foreclosure, you can include the debt in either Chapter 7 or Chapter 13 bankruptcy proceedings.
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Facts
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When a mortgage lender forecloses on your home, it seizes its security interest -- the property. Because property values fluctuate, the amount you owe on the loan may exceed the amount the lender can recover by selling the property. Any leftover debt constitutes a mortgage deficiency that, in most states, you are responsible for paying. You can legally discharge the remaining mortgage debt you owe through bankruptcy.
Significance
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Unlike other forms of unsecured debt, mortgage debt tends to range in the thousands, if not the hundreds of thousands, of dollars. This makes a reasonable payment plan difficult for many consumers. Should the mortgage lender file suit, you could face such consequences as a wage or bank account garnishment. In some states, a successful lawsuit from your mortgage lender gives it the right to place liens against your other assets. Bankruptcy provides you with an alternative to these consequences.
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Considerations
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As a rule, consumers must pay taxes on any debts that a lender forgives. The Mortgage Forgiveness Debt Relief Act of 2007 protects many homeowners from paying taxes on foreclosure and short sale debts forgiven by their lenders. If you do not fit the criteria for tax forgiveness, however, you must pay taxes on any mortgage deficiency your lender does not pursue. This could leave you owing a considerable debt to the IRS, whose collection abilities far outstrip those of any mortgage lender.
If you include your foreclosure debt in a bankruptcy proceeding, it isn't subject to taxation. Filing for bankruptcy, therefore, provides protection even for former homeowners whose mortgage lenders opt to forgive, rather than pursue, their outstanding loan debts.
Types
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When you file for bankruptcy on your foreclosure debt, you must meet certain qualifications to have the deficiency discharged in its entirety. The U.S. Bankruptcy Code only offers consumers a full discharge under Chapter 7. To qualify, your income must be equal to or below that of the average household in your county. If you do not qualify for Chapter 7 bankruptcy, you can file for bankruptcy under Chapter 13, which requires you to pay off any debts you owe over a three- to five-year repayment plan.
Time Frame
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Although bankruptcy presents a potential solution to a looming mortgage deficiency, it isn't necessary in all cases. Because the debt you owe is no longer secured by property, your lender has a limited amount of time in which to take legal action against you. Once your state's statute of limitations for debt collection expires, the mortgage lender cannot force you to pay off your remaining mortgage debt.
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