How Long Can a Bank Collect From a Foreclosure?
Your home secures your mortgage loan. Thus, when you stop making payments on the mortgage debt, the bank reserves the right to foreclose on and seize the property. Foreclosure sales do not always generate enough money to cover the borrower's remaining mortgage debt. Should this happen to you, your lender can pursue you for the outstanding mortgage deficiency.
Other People Are Reading
-
Statute of Limitations
-
After the bank sells your home, any mortgage deficiency that you owe becomes an unsecured, rather than secured, debt. This is because your lender already seized and liquidated its collateral--your home. If a mortgage deficiency exists after the foreclosure sale takes place, the mortgage lender can collect the debt indefinitely, but each state limits the amount of time any unsecured creditor can file a lawsuit against you when recovering a debt.
Deficiency Judgment Enforcement
-
If the mortgage lender sues you for the deficiency and wins a judgment in court, it is no longer subject to your state's statute of limitations for debt collection. Judgment holders must adhere to the state's judgment enforcement period.
During the judgment enforcement period, the mortgage lender can force you to make payments on your remaining mortgage debt through garnishment. If the lender does not receive payment in full by the time the judgment expires, it may renew the court judgment for a subsequent enforcement period. Like the statute of limitations for debt collection, each state's regulations vary regarding judgment enforcement and renewal periods.
-
Non-recourse States
-
Non-recourse states, such as California and Connecticut, do not permit mortgage lenders to pursue deficiencies after foreclosing on a home. In a non-recourse state, the lender must accept the loan's security--in this case, the home--as payment in full for the debt. If the debt value exceeds the loan's value, the lender can neither sue the borrower for the debt nor request that the borrower make voluntary payments on his mortgage deficiency.
Tax Write-offs
-
Not all mortgage lenders pursue debts that remain following a foreclosure. In this case, the bank writes off the unpaid balance as a loss on its annual business taxes. When a lender or creditor writes off a debt as not being able to be collected on its taxes, the Internal Revenue Service then requires that the debtor include the written off amount as income on her tax return--essentially collecting the debt that the bank could not. The bank may write off money that it cannot collect at any time. Once the bank claims the debt as a tax loss, it will no longer pursue the borrower for payment.
The Mortgage Forgiveness Debt Relief Act provides tax relief to individuals who owe foreclosure and short sale debts by not requiring these debtors to pay taxes on the forgiven loan balance. This protection ends on Dec. 31, 2012.
-
References
Resources
- Photo Credit you owe me money. image by Ken Pilon from Fotolia.com
