Financial Problems After Foreclosure
Financial problems can leave you unable to successfully make your mortgage payments and result in the bank foreclosing on your home. Unfortunately, for many former homeowners, foreclosure does not mark an end for the financial strain they suffer. Post-foreclosure debt and the tax consequences that sometimes follow foreclosure can leave you paying off your foreclosure debt long after you lose your home.
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The Mortgage Deficiency
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If your lender sells your home for an amount greater than or equal to your outstanding mortgage loan, you are not responsible for making any further payments to the bank. If, however, the bank cannot sell your foreclosed home for enough money to cover the balance you owe, you remain legally responsible for paying that balance -- known as the "mortgage deficiency."
Although the bank can only sue you for the mortgage deficiency for a preset period of time, depending on your state of residence, it can pursue you for payments indefinitely. Certain states, such as California, do not allow lenders to pursue post-foreclosure mortgage deficiencies.
Garnishment
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If your lender sues you for the deficiency you owed on your foreclosed home, it earns the right to seize money from you involuntarily through garnishment. Former mortgage lenders can garnish either your wages or bank accounts. Regardless of how your former lender garnishes your income, both forms of garnishment reduce the disposable income available for you and your family to meet your daily needs. This sometimes results in financial problems.
Garnishment often arrives unexpectedly. A lender can wait to file a garnishment order until your post-foreclosure financial situation recovers -- giving it the ability to seize a greater amount of money from you.
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Tax Consequences
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Your lender will evaluate your income level when determining whether or not you are a good candidate for a lawsuit. If the lender does not believe it can successfully recover the deficiency you owe via lawsuit, it will "forgive" the balance. This does not mean, however, that you won't face financial consequences as a result. Lenders write off forgiven balances with the Internal Revenue Service. At the end of the year, you must then pay taxes on the amount your lender wrote off. The Mortgage Forgiveness Debt Relief Act protects certain homeowners from facing tax penalties as a result of post-foreclosure debt, but this protection ends on December 31, 2012.
Future Purchasing Problems
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Buying another home immediately after foreclosure is often not possible. Mortgage lenders will not finance you for a new home purchase immediately after losing your previous home, and a public record of your foreclosure remains a part of your credit history for seven years.
When you finally do purchase another home, however, the reduced credit rating you suffered as a result of your previous foreclosure will leave you facing higher interest rates, which translate to higher monthly payments. Banks closely scrutinize your economic situation when determining your eligibility to buy a home. Even with the required down payment, a past foreclosure can lower your purchasing power.
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References
- CNNMoney.com; You Lost Your House --- But You Still Have to Pay; Les Christie; February 2010
- Lawyers.com: Creditors' Legal Rights; William Fischer; 2010
- "The New York Times"; After Foreclosure --- A Big Tax Bill From the I.R.S.; Geraldine Fabrikant; August 2007
- IRS.gov: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation; May 2009
- Federal Trade Commission: The Fair Credit Reporting Act
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