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When a person forcloses, do they still owe the bank? Someone told me that the owner does not get away scott-free? I understood that they do as long as they return the property? How does this work?
If the remaining mortgage is for more than the value of the home, then the owner is responsible for the difference.
For example, let's say you have a mortgage for $200,000 that you can't afford payments on anymore. The bank forecloses, and sells the house for $150,000. That leaves a difference of $50,000 that you are still responsible for, and the bank may still pursue their money.
However, oftentimes the bank will "forgive" the difference. The IRS on the other hand, sees the forgiven debt as income. Because essentially, you earned $50,000 worth of income when the bank forgave the difference in the loan. That's $50,000 that will now be taxed and collected by the government. So even though you never physically saw the $50,000 worth of forgiven debt, it is still viewed as taxable income.
Either way you cut it, you do not get away scott-free. You credit and finances will be ruined for at least seven years (the amount of time a foreclosure is reported on your credit).
When a person forcloses, do they still owe the bank? Someone told me that the owner does not get away scott-free? I understood that they do as long as they return the property? How does this work?
If the remaining mortgage is for more than the value of the home, then the owner is responsible for the difference.
For example, let's say you have a mortgage for $200,000 that you can't afford payments on anymore. The bank forecloses, and sells the house for $150,000. That leaves a difference of $50,000 that you are still responsible for, and the bank may still pursue their money.
However, oftentimes the bank will "forgive" the difference. The IRS on the other hand, sees the forgiven debt as income. Because essentially, you earned $50,000 worth of income when the bank forgave the difference in the loan. That's $50,000 that will now be taxed and collected by the government. So even though you never physically saw the $50,000 worth of forgiven debt, it is still viewed as taxable income.
Either way you cut it, you do not get away scott-free. You credit and finances will be ruined for at least seven years (the amount of time a foreclosure is reported on your credit).
This vary's from state to state. Arizona is a non-recourse state. The lender can not go after the difference. You owe the lender nothing after the foreclosure.
In the past, many lenders, although required to, never got around to filling out 1099's.
Here's an IRS link that discusses the taxable forgiven debt.
However, if I'm not mistaken, it was recently passed, in order to assist the people in foreclusure, that the government would not tax the forgiven debt. I can't find that, so I may be wrong. If someone knows for sure perhaps they can post a link.
The current tax code requires a lender who forgives debt to provide a Form 1099 to the IRS stating the amount the borrower has been forgiven. This disclosure applies whether it is a short sale, foreclosure, deed in lieu of foreclosure or any similar arrangement that relieves the borrower of the obligation to pay some portion of their debt. If the property is sold at foreclosure or is sold for less than was borrowed, that difference is considered income and is subject to the tax.
H.R. 3648 would ensure that any amount forgiven on mortgage debt secured by a principal residence will not be taxed. The legislation has a provision to safeguard against abuses. That provision is similar to one that already exists for commercial real estate owners and would treat commercial and residential property equally.
It is my understanding that the forgiveness has to do with the original loans only. That means if you refinanced and pulled equity out that portion is still subject to tax. Then there is the situation of being insolvent, which means if your assests are less than your debt (in a whole) that you are insolvent and not subject to the tax. There are also situations that affect the difference (as in the example above, the $50K) which might mean you don't owe on the whole $50K but a portion of it. It's pretty complicated and you should really speak with a tax accountant to determine how it would affect you and your situation.
What happens to the $60,000.00 down I placed on my home if I owe $150,000 on my mortgage and then $40,000 on my second mortgage and need to possibly forclose? Any possibility I could walk away with cash from a forclosure?
What happens to the $60,000.00 down I placed on my home if I owe $150,000 on my mortgage and then $40,000 on my second mortgage and need to possibly forclose? Any possibility I could walk away with cash from a forclosure?
What happens to the $60,000.00 down I placed on my home if I owe $150,000 on my mortgage and then $40,000 on my second mortgage and need to possibly forclose? Any possibility I could walk away with cash from a forclosure?
You lose any downpayment you made. The only cash you might get from a foreclosure is a payoff from the bank to not trash the house. I've seen sellers get $1500 from the bank to leave the house in good condition.
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Thanks all for responding
