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Foreclosure: Your personal liability may not end after the sale

I received a question today regarding continuing liability after a home has been lost to foreclosure. The homeowner wanted to know if they could not make the mortgage payment and lost the home in foreclosure, would they have any further liability. The answer is - they might have significant continuing liability. Under Florida law, if the foreclosure action is completed, your house will be sold at Sheriff's Sale and you will lose the property. If the value of the property on the date of the Sheriff's Sale was less than the mortgage balance, the bank will have the option to file a motion for a deficiency judgment after the foreclosure sale. This is an additional court proceeding that could result in a personal judgment against you for the deficiency. The bank could take steps to enforce this judgment against other assets that you own. In addition, there may be federal income tax consequences in connection with a foreclosure proceeding and subsequent deficiency judgment, a short sale, or a deed in lieu of foreclosure. Depending on the facts and circumstances, you could receive a 1099 reporting income for the forgiveness of the mortgage debt. Bottom line: allowing a property to go into foreclosure might not be the end of personal liability for obligations related to the property. A deficiency judgment and/or 1099 income are possibilities. If you or your client is facing a foreclosure, I urge consultation with a real estate attorney as soon as possible to evaluate the facts of the situation and explore the possible strategies and consequences.

Posted by Marlyn Wiener on 12/07/2007 09:34 PM

Comments (10)

florida, foreclosure, deficiency judgment, real estate

10 Comments on Foreclosure: Your personal liability may not end after the sale

DEC

2007

Same with a short sale..

Marilyn -

I believe very few agents are actually aware of the possible financial and tax consequences of a short sale, foreclosure and subsequent Sheriff's Sale, or Deed in Lieu. In many cases, depending on the seller's financial condition, the IRS might consider the short sale FORGIVEN DEBT, if the lender 1099's it to the unfortunate seller.

The bank wouldn't take this step just to be vindictive - they actually get a tax write-off for themselves by forgiving the debt, often to a more positive financial outcome for them than if they negotiated short. I just encountered this kind of problem with Washington Mutual on a condo in Chicago, where we work, when they were in second position on the loan.

If the bank later files a Deficiency Judgement, that could further exasperate the problem, although attorneys work with here in IL have been pretty effective in getting the Seller's Lender to waive their right to file a deficiency claim if the property is sold short.

Very frustrating, for the seller, of course, piling on to one of the most demoralizing things anyone can go through.

Agents, please understand the process and advise your clients properly - or send them to competent lawyers or accountants who can advise them.

DEAN & DEAN'S TEAM CHICAGO

DEC

2007

Dan:

Thanks for your comment. Most borrowers facing foreclosure are not aware of these additional negative consequences and find out when it is too late to negotiate with a lender to soften the blow. They are reluctant to spend more money for a professional adviser to assist them when they have already lost so much. Unfortunately, they may find out later that getting advice early on and working out a waiver on the deficiency judgement would have been the best money they ever spent!

Marlyn

Marilyn -

Absolutely agree! Happy Holidays!

Dean

DEC

2007

If the agent doesn't have the sellers best interest in mind it can be devastating.

FEB

2008

Marlyn, well written and accurate article, albeit not good news for many Floridians.

Paul

APR

2008

Marilyn -- good article. Are there any different rules regarding obtaining deficiency judgments if it is a deed-in-lieu vs. a foreclosure?

AUG

2008

I heard that the federal governtment passed a law forgiving the home owner the liability of paying taxes on the 1099. Is this true?

Paul:

Please take a look at my earlier blog entry on the Mortgage Forgiveness Debt Relief Act of 2007. If you have questions about your particular situation - I suggest you consult an attorney or accountant to determine if you will be covered by this Act.

AUG

I have read about deficiency judgements and of 1099-C forms for income tax purposes. My confusion begins when a person is slapped by both? How can one be seriously responsible for paying a deficiency judgment AND paying income taxes on a debt that obviously is not forgiven (since there is now a deficiency judgement). My logic tells me that it is either one or the other, but not both.

I am aware of the Mortgage Forgiveness Debt Relief Act of 2007 the Bush administration passed, then extended. (It was originally intended to last until the end of 2009, but was revised in 2008 so that now this law is in affect until 2012.)

None of this will apply to me personally, as I am on the fast track to chapter 7 bankruptcy and am thus surrendering the house. My concern is with my sister's mother-in-law, who just retired this year. She has done a short sale on her condominium so that she could move out-of-state to live near her son (and my sister) in her retirement years.

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