Post Foreclosure Process
Foreclosure can be brutal. Ending the process to begin a fresh financial start is a notable goal for many homeowners. However, foreclosure consequences do not end with you turning over your keys to the lender. Depending on the laws in your state, you can be in for additional financial and legal woes.
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Cancellation of Debt
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One of the major considerations following foreclosure is whether or not your lender plans to cancel your debt. Debt forgiveness is the ticket to your fresh start after you lose your home. If the lender does not cancel your debt, you may be served with a deficiency judgment for all or part of the remaining balance on your mortgage loan. Deficiency judgments do not always come immediately. In some states, lenders or its collections agencies can come after you once you regain financial stability to have you pay the outstanding debt. You can protect yourself from the shock of a lawsuit by consulting with a HUD-certified foreclosure counselor to learn your state's laws regarding deficiency judgments and how you can get prepared.
IRS
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When the lender chooses to cancel any of your mortgage debt, the debt is considered income for tax purposes. Homeowners are excluded from taxation on their mortgage loans as long as they are legally responsible for repaying the debt. However, once a lender releases you in part or in full for your mortgage debt, you are subject to income taxation on the remaining mortgage debt. A tax professional can help you determine whether you qualify for an exclusion from cancellation of debt tax. Many homeowners are protected from cancellation of debt tax under the Mortgage Debt Relief Act of 2007.
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Mortgage Debt Relief Act of 2007
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Homeowners with debt cancelled between 2007 and 2012 are usually excluded from cancellation of debt taxation. If your home is your primary residence and the amount of your cancelled debt is less than $2 million, you are not required to pay taxes if you are married and filing jointly. Any homeowners who do not meet these minimum requirements must find additional opportunities to escape taxation. For example, homeowners who are insolvent or bankrupt can claim an exclusion.
Insolvency and Bankruptcy
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You are insolvent when the fair market value of your assets is less than your liabilities at the time your debt is cancelled. Insolvency is claimed on IRS Form 982 and submitted with your income tax return. However, the IRS recommends consulting with a tax professional determine the extent to which you were insolvent when your debt was cancelled. Calculations are complex and reporting inaccurate information can result in further penalties. Bankruptcy also excludes you from cancellation of debt taxation. However, you must send official documentation of your bankruptcy with your tax returns.
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