By , June 14, 2016

We at the Law Offices of Anthony J. Allen know how important your home is to you and how devastating it can be when you fear that you may lose your home. The following is a little about the current state of foreclosures, and how the system works. As each case is driven by its own facts, please seek legal counsel before making any decisions about how to proceed.   

Unfortunately, for a number of reasons, foreclosures have risen over the last year. Some of these foreclosures are on residential prop­erties. Some of these foreclosures are on investment properties.

Generally, the note and mortgage holder, usually a bank, will file suit and request in the lawsuit that the property be sold at a Sheriff’s Sale and that the signer of the note and mortgage, usually the homeowner, will be held liable for any amount that is still owed on the note after the property has been sold and the proceeds have been applied to the outstanding balance.

Simply put, if one files bankruptcy prior to the time of the Sheriff’s Sale, the debt that is still owed after the sale will be discharged in the bankruptcy.

Until a few years ago, this was the general scenario. However, in these trying financial times, that has changed. A new scenario is that the holder of the note will merely file suit on the note and not try to recover the property. In other words, if you owe $100,000 and you have not paid that amount, the creditor will merely sue you for that amount.

If you do not answer within 28 days, they will take a default judg­ment for $100,000. This leaves you in a position where you still own the house and they have a judgment against you for that amount. This is pretty beneficial for the bank. First of all they can garnish your wages, they can garnish your bank accounts, they can attach your personal property for their judg­ment of $100,000 and they have no obligation to maintain insurance on a property that is still in your name. Then you can’t sell the property without bank approval because there is still a mortgage on the property that the creditor has not released.

Another scenario is the above scenario with one additional fact. Not only does the bank take the $100,000 judgment, they then forgive the judgment.

Please understand that forgiveness of debt to the Internal Revenue Service equals income. Therefore, the Internal Revenue Service will impute $100,000 to your income if the debt is forgiven probably raising your tax bracket and certainly creating a tax liability.

Please understand that generally tax liability is not dischargeable in bankruptcy whereas unfor­given debt may be discharged in bankruptcy such that there is no debt to be forgiven and therefore no tax liability.

This can be tricky and you need to speak with experienced counsel before making any financial moves in this area. 

We are aware that under certain circumstances on the first mortgage on a residential property, there may be no tax liability for the debt that is forgiven. However, if it is not a first mortgage, if it has been refinanced with a cash out, if it is a second mortgage, or if it is not a residential mortgage, the forgiveness of the tax debt may not apply.

Therefore, if you are beginning to have difficulty with your mortgage, or if you have been sued in a foreclosure action, we certainly recommend that you seek an attorney who is experienced in collec­tion defense and bankruptcy who may be able to direct you.

The best result would be that the bank would not be permitted to seek recovery of any deficiency bal­ance; if the bank cannot seek a deficiency balance, it cannot forgive a deficiency balance; if there is no forgiveness, there is no tax liability.

These are complicated matters. Therefore, we certainly recommend that you seek competent counsel to assist you as early as possible in any process where you think you may be losing your home or investment property.

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