What are the chances that the bank will sue me for a deficiencyafter forclosure?

I may have to do a foreclosure in ID. We owe $198,000 on the loan which was refinanced a few years ago, and now due to taxes owed and huge credit card debt we may have to walk away. My house is worth maybe $110,000 per market and other houses in my area. Will we have to pay the balance to the bank and what are the chance that will they come after me for the balance. I understand that I may also be responsible for tax if its written off? I also found on IRS web site if you have been at resident for more then 2 years you get a rite off and dont have to claim that is income is that correct?

Asked on March 24, 2011 under Real Estate Law, Idaho

Answers:

M.D., Member, California and New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

In ID, a "deficiency judgment" can be obtained when a foreclosed property is sold at a public sale for less than the loan amount that the underlying mortgage or deed of trust secures. However, a legal action to obtain such a judgment must be brought within 90 days after the foreclosure sale. Also, a judgment cannot exceed the difference between the amount of the debt and the fair market value of the property. Costs and fees in filing the deficiency can also be recovered.

As for the tax consequences, what you are referring to here is the potential tax liability that occurs when a property is sold for less than the remaining balance on the existing mortgage.  In order to be liable for taxes, a lender must agree to forgive this difference (ie the "deficiency").  Typically, this "forgiveness of indebtedness" is a taxable event since the IRS will treat this as "imputed" income.  In other words, if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.  In the past you would have had to pay taxes on this amount.  However, "The Mortgage Debt Relief Act of 2007" generally allows taxpayers to exclude income from the discharge of debt on their principal residence (at least through 2012). 

That all having been said, with a foreclosure the lender typically does not agree to waive its right to collect on the deficiency.  That being the case, since it doesn't forgive any indebtedness, there are no imputed income tax consequences.  But note -  you are still liable for the deficiency.

At this point, you really should consult directly with a real estate attorney and/or tax professional in your area. 


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