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Steps After Foreclosure

Foreclosure is a stressful saga that ends with the loss of your home. For homeowners, however, the loss of a home is only the start of new financial and legal woes. The impact of foreclosure varies by state. Take the necessary steps after foreclosure to prepare yourself for the worst case scenario.

  1. Losing Your Home

    • The foreclosure process ends with the sale of your home at public auction and receipt of an eviction notice. Eviction notice terms vary by state, but once you receive an auction date, prepare by searching for a new property. The lender auctions your home with the hope of recouping your outstanding mortgage debt. However, not all homes sell at auction. Homes with negative equity or that are in declining neighborhoods are less likely to produce bids. If the home does not sell, it becomes the possession of the lender. Lenders place your home on the market for a second attempt at recouping your mortgage debt.

    Remaining Mortgage Balance

    • The lender makes a reasonable attempt to recoup the loss of its investment, but success is not guaranteed. Whether the lender decides to forgive your mortgage debt is at the lender's sole discretion. However, there are limitations on how the lender can pursue a deficiency judgment against you. In some states, the lender can wait years until you regain financial stability to file a lawsuit to ensure you are able to repay the debt. Consult with a HUD-certified foreclosure counselor to determine your foreclosure rights to eliminate any financial surprises.

    Forgiven Debt

    • Debt forgiveness can be a considerable relief. Escaping hundreds of thousands of dollars in debt can offer you the opportunity to regain stability much faster. However, the IRS may request cancellation of debt tax on your forgiven debt. While you are responsible for the mortgage debt, it is not considered a source of income. However, once the lender releases you from legal obligation, the IRS considers the loan a taxable source of income.

    Exclusions

    • Homeowners who qualify for an exclusion from cancellation of debt tax due to insolvency or due to the Mortgage Debt Relief Act of 2007 are not required to pay this tax. You qualify for exclusion due to insolvency if the fair market value of your assets is less than your liabilities at the time your debt is cancelled. You qualify under the Mortgage Debt Relief Act if your home is your primary residence and the amount of your cancelled mortgage debt is less than $2 million.

    Getting Help

    • The IRS recommends consulting with a tax professional to determine whether you are eligible to claim an exclusion from cancellation of debt tax. Insolvency exclusions are claimed on IRS Form 982. If you can afford a foreclosure attorney, he may be able to help you reduce or eliminate your remaining mortgage debt. Prepare your paperwork in advance so that your meeting with the attorney is productive. Arrange all prior correspondence with your lender in chronological order as well as your financial records such as mortgage statements and household bills. If your debt cannot be remedied, your attorney can help you file bankruptcy or create payment arrangements with your lender.

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