If my house was foreclosed on and sold back to the lender for the loan price, can the lender still get a deficiency judgement against me?

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If my house was foreclosed on and sold back to the lender for the loan price, can the lender still get a deficiency judgement against me?

Asked on July 23, 2011 Kansas

Answers:

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

Answered 12 years ago | Contributor

Yes, it can. This is because a lender has not only the right to the remaining mortgage balance but to related costs as well. These include but are not limited to: legal fees, accelerated interest payments, back principal payments, in some cases pre-payment penalties, and other expenses as part of the judgment process. This is why a homeowner could owe more than they originally borrowed.

However, a lender doesn't always choose to pursue a deficiency judgement. The major factors are whether the lender feels it can collect the judgment and the cost of doing so. The lender will pull the borrower's credit to see what other outstanding bills they have and whether they are being paid on time. The homeowner may be asked to fill out a "Net Worth Statement" (NWS) which will disclose assets to the lender. This document is a major part of the decision to pursue a judgment or not.

If the lender has no reason to believe the homeowner has extensive assets, it will instead report the loan deficiency amount on IRS Form 1099. The result to the homeowner is a "phantom" or "imputed" income on the amount of the cancelled debt. However this means that they only have to pay income taxes on the amount of the deficincy versus paying the entire deficiency judgment. This is a substantial savings. Even better for them though is "The Mortgage Debt Relief Act of 2007" which generally allow a homeowner/taxpayer to exclude this phantom/imputed income on their tax returns (at least through 2012).  

Note: Depending on whether the foreclosure is judicial or non-judicial, and the specific terms of the mortgage, the bank may not be able to seek a deficiency judgment. Additionally, the deficiency judgment is determined by a court-approved "final judgment" amount in most states, which can be challenged by a borrower.

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

Answered 12 years ago | Contributor

Yes, it can. This is because a lender has not only the right to the remaining mortgage balance but to related costs as well. These include but are not limited to: legal fees, accelerated interest payments, back principal payments, in some cases pre-payment penalties, and other expenses as part of the judgment process. This is why a homeowner could owe more than they originally borrowed.

However, a lender doesn't always choose to pursue a deficiency judgement. The major factors are whether the lender feels it can collect the judgment and the cost of doing so. The lender will pull the borrower's credit to see what other outstanding bills they have and whether they are being paid on time. The homeowner may be asked to fill out a "Net Worth Statement" (NWS) which will disclose assets to the lender. This document is a major part of the decision to pursue a judgment or not.

If the lender has no reason to believe the homeowner has extensive assets, it will instead report the loan deficiency amount on IRS Form 1099. The result to the homeowner is a "phantom" or "imputed" income on the amount of the cancelled debt. However this means that they only have to pay income taxes on the amount of the deficincy versus paying the entire deficiency judgment. This is a substantial savings. Even better for them though is "The Mortgage Debt Relief Act of 2007" which generally allow a homeowner/taxpayer to exclude this phantom/imputed income on their tax returns (at least through 2012).  

Note: Depending on whether the foreclosure is judicial or non-judicial, and the specific terms of the mortgage, the bank may not be able to seek a deficiency judgment. Additionally, the deficiency judgment is determined by a court-approved "final judgment" amount in most states, which can be challenged by a borrower.


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