A mortgage foreclosure does not automatically result in a deficiency judgment. Just because you lose a property at foreclosure does not mean you will remain personally liable for money owed to the lende . To obtain a deficiency judgment against the borrower the foreclosure sale the mortgage lender has to file a motion for a deficiency after the foreclosure sale, and the court must hold a separate evidentiary hearing on the lender’s request for deficiency liability.
You can possibly negotiate for the release of both the property lien and the underlying personal debt secured by the note. If you fail to do this, the lender may not forgive the personal debt and it will become a collection. You can do this through.
Typically states with anti-deficiency laws apply only to 1st mortgages, and it must be your primary residence. It may also depend on what type of loan you have. In Arizona, despite the anti-deficiency law, if it’s a VA or FHA loan, they can file a deficiency judgment.
If a mortgage lender pursues a deficiency judgment you should hire an attorney to defend the deficiency. In many cases, an attorney can use procedural defenses and substantive lending law to defeat a deficiency claim, and the attorney can negotiate an acceptable settlement for much less than the total deficiency liability in most cases.
The second mortgage holder gets nothing at the foreclosure sale. If the first mortgage holder pursues a deficiency judgment (and again, this is usually not the case), the borrow can defend the action in part by arguing that the mortgagee has been satisfied by its repossession of the property. The borrower does not have this defense against the second mortgage.
One of the best things you can do is have someone negotiate a short payoff or a short sale on your home and have the lender agree to a “satisfaction” which means the lender is giving up their right to go after the homeowner for the deficient amount. If they only agree to “release the lien” then they still have their right to file a deficiency judgment.
In California Code 580b is a valuable resource, I am not sure of the codes in the other states. You should definately consult with an attorney and have them review your docs to check your qualifications under this law to see if you are protected from any deficiency.
From the The IRS on Shorts Sales, Foreclosures and Debt Forgiveness.
The IRS on Shorts Sales, Foreclosures and Debt Forgiveness
Update Feb. 4, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.
This provision applies to debt forgiven in 2007, 2008 or 2009. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
The amount excluded reduces the taxpayer’s cost basis in the home. More information on claiming this exclusion will be available soon.
The questions and answers, below, are based on the law prior to the passage of the
Mortgage Forgiveness Debt Relief Act of 2007.
1. What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.
2. Is Cancellation of Debt income always taxable?
It is wise to consult with an Attorney who is familiar with DEBT negotiation and has significant experience working with lenders. Keep in mind that Attorney’s fees or Realtor fees come out of the lender’s net proceeds, therefore, you MAY not have to pay out of your own pocket for an Attorney or Realtor to assist you with the transaction.
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