Federal Government Laws Regarding Foreclosure
Federal law creates the framework and state law works out the details for foreclosure in individual states. Federal laws provide protection when Congress decides the need exists. Congress has enacted laws to protect certain classes of individuals in foreclosure. The federal government protects active duty military and tenants facing foreclosure. Federal taxation and bankruptcy touch on foreclosure as well. If you are active duty military, a tenant facing eviction, a bankrupt homeowner or a federal taxpayer, the federal laws on foreclosure affect you.
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Servicemembers Civil Relief Act of 2003
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The Servicemembers Civil Relief Act of 2003 expanded the Soldiers and Sailors Relief Act, originally enacted in 1940. This law affords protection to soldiers on active duty from foreclosure on mortgages taken prior to active duty. The soldier must be present, so default judgments often specify that a foreclosure borrower is not in the military. The law protects military families from eviction for nonpayment of rent while the service member is on active duty. The protection of the law limits lease amounts to less than about $3,000 in 2011 with annual adjustment for inflation.
Protecting Tenants at Foreclosure Act
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Tenants now receive a notice of at least 90 days if foreclosure affects the rented property. A tenant with a lease may stay to the expiration of the lease term unless the new homeowner purchased the home for a residence. In that case, the new owner may give a 90-day notice to the tenant. This extends the notice required by state law in many states. Cities with "just cause" evictions require more than foreclosure to evict a tenant. The property changing hands is insufficient for eviction, since the lease survives the foreclosure under this federal law.
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Bankruptcy
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If a borrower files for bankruptcy, an automatic stay stops the foreclosure action under federal bankruptcy rules. The mortgagor can proceed with the foreclosure with a lifting of the stay or evidence that the bankrupt has no interest in the property. The bankruptcy court may opt to sell the property if the bankrupt has an interest. Alternatively, the foreclosure waits until the bankruptcy court completes the action.
Mortgage Forgiveness Debt Relief Act
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This act affects federal income taxation in loan modifications or foreclosures. If the foreclosure is on your primary residence, you may not incur federal income taxes on any forgiveness. This law does not apply to second residences or loans not used for purchase or improvement of the principal residence with the residence as collateral. Congress extended this law through 2012. Borrowers should receive a Form 1099-C reflecting the indebtedness changes for tax purposes.
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