Financial Responsibility After a Foreclosure
Foreclosure is a horror story that does not end with your eviction from your home. When the foreclosure proceedings end, the saga can continue with the lender's decision to cancel your debt or file a deficiency judgment. However, not all foreclosures result in extended financial woes. Your circumstances at the end of the foreclosure proceedings dictate your level of financial responsibility.
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Cancellation of Debt
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Your loan servicer has the right to cancel your remaining mortgage debt at the conclusion of the foreclosure process. This means you have no legal obligation to repay the balance of the loan. To the Internal Revenue Service, your newfound freedom from legal ties to your mortgage obligates you to pay cancellation-of-debt taxes. While you were legally bound to pay back your loan, the IRS waived its right to tax your mortgage loan as a source of income. The minute the debt is cancelled the remaining loan balance becomes taxable.
Hardship
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Not all homeowners are responsible for taxes. You can claim an exclusion if you can prove insolvency at the time your debt was cancelled. You are insolvent when your liabilities exceed the fair market value of your assets. Calculations for insolvency are complex. The IRS recommends seeking the help of a tax professional before attempting to make this claim. The extent to which you were insolvent determines how much, if any, you are responsible for paying in taxes.
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Deficiency Judgments
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When your mortgage debt is not cancelled, you may receive an immediate notice of cancellation from your lender, but not always. Silence from the lender may mean trouble down the road. Your lender can wait until you regain financial stability before filing a deficiency judgment. The lender's right to file a lawsuit varies by state. Consult with a foreclosure attorney to learn your rights in the event your lender files a lawsuit in the future.
Considerations
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Foreclosure debt is accounted for either through your taxes or a judgment from the lender. Lenders do not always forgive the entire amount of your mortgage debt. Instead, you may receive a partial cancellation of your debt, which means partial taxation from the IRS. If you are lucky enough to negotiate a short sale or deed-in-lieu of foreclosure, getting rid of your debt can be a matter of requesting a release when you negotiate the terms of your transaction.
Your attorney can offer the proper forms needed to release you from your debt. If you can't afford a foreclosure attorney, foreclosure counseling agencies can offer advice to help you through the process.
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