Advice on Consequences of Foreclosure

We can't afford to pay our mortgage, and the title and the mortgage are in my spouse's name only. What's the worst that can happen?

We cannot afford to pay our mortgage. The title and the mortgage loan are under my spouse's name only. Should I file income tax with my spouse or not? (we always filed together before), but I am trying to save my credit for the future, so we can rent a place. Do I still have to pay the property tax? What can the city do? We have one car paid in full (worth about $5,000), and my house is going to foreclosure. The bank can go after my car?

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Bill's Answer
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Due to the downturn in the U.S. housing market, many Americans are currently facing the foreclosure of their homes. Thankfully, there are several ways that you may be able to mitigate the damage caused by foreclosure. To read more about foreclosure, I encourage you to review the Bills.com foreclosure page.

Given the difficulty of your financial situation, you may have no choice but to give up the home. The easiest choice may be to place your home on the market; hopefully you can sell the home for a reasonable price which will allow you to liquidate any equity you have built in the property.

Short Sale

If you owe more on the home than it is worth under current market conditions, you may need to discuss a short sale with your lender. In a short sale, your lender would allow you to sell the home for less than you owe on your mortgage, thus avoid foreclosure. Many lenders will also forgive the difference between the amount owed on the mortgage and the short sale proceeds, preventing large deficiency balances which can often result from foreclosures. If you are interested in a short sale of your property, you need to consult with your lender to determine if it will approve a short sale and what terms would apply to the sale.

Foreclosure

If you are unable to sell the home, or if the lender refuses to agree to a short sale, your home may be foreclosed and sold at auction. The lender would usually apply the sale proceeds to the balance of your mortgage, and you would be responsible for any balance left on the mortgage loan; this type of obligation is referred to as a “deficiency balance.” Whether your lender can pursue your spouse (since he or she is the only person on the loan) for payment of any deficiency balance resulting from the foreclosure of your home greatly depends on your state’s laws. While most states allow lenders to collect deficiency balances just like any other unsecured debt, a few states, such as California, do not allow for the collection of deficiency balances resulting from the foreclosure of purchase money loans (i.e., a first mortgage that was used to purchase the property). However, if a California consumer refinanced his loan or took out a second mortgage, those lenders likely would be able to pursue the consumer for payment.

Quick Tip

Each state legislature created unique foreclosure and anti-deficiency laws. Follow the links just mentioned to learn the foreclosure rules relevant to you.

Foreclosure and Judgment

If your state allows for collection of deficiency balances, it is possible that your lender could sue you and obtain a judgment for any deficiency balance owed. Once a judgment is entered against you, the lender may be able to seize any non-exempt property you own. Whether your vehicle would be exempt depends on your state’s exemption laws, so I would recommend that you discuss this matter with an attorney. However, I can tell you that it is rare for any judgment creditor to seize a vehicle, as the benefits for the creditor rarely outweigh the costs and inconvenience associated with trying to take possession of a consumer’s vehicle.

Foreclosure and Bankruptcy

One possible way to resolve any deficiency balance resulting from the foreclosure of your property would be to file for bankruptcy protection. If you qualify to file for Chapter 7 bankruptcy, the bankruptcy court may discharge your unsecured debts, including any deficiency balance you owe. Bankruptcy may also be able to protect your vehicle and any other exempt assets you may own. I strongly encourage you to consult with an attorney to discuss the possible consequences of foreclosure, deficiency balances, and judgments in your state, and to determine if bankruptcy may help relieve some of your financial woes. To read more about bankruptcy, you can visit the Bills.com bankruptcy page.

Foreclosure and Taxes

In regard to your tax situation, I cannot provide you with tax advice, and I encourage you to consult with a qualified tax professional, such as a certified public accountant (CPA) or an attorney specializing in tax law. Generally speaking, I cannot see how the financial difficulties you are facing would change your federal income tax filing status, or how you and your spouse’s filing separate income tax returns would benefit you. As to your other tax questions, delinquent property taxes generally result in a lien on the property, which must be paid before the home or land can be transferred. In the case of foreclosure, the delinquent property taxes would likely be paid by the lender who wishes to foreclose. I cannot tell you whether you should pay your property taxes, but you should know that, because your home is already in foreclosure, there are likely few consequences if you are unable to pay the taxes. Again, consult with a qualified tax professional to determine how your financial troubles may affect your tax liabilities.

Quick Tip

Debt distressing you? The Bills.com Debt Coach is a no-cost online tool that will analyze your debts and show you the options available to resolve them and the costs and benefits of each.

Before you resign yourself to allowing your home to go into foreclosure, you should explore the options available to prevent foreclosure. If you are forced into foreclosure, the information I have provided may help you mitigate the damage. I wish you the best of luck in resolving your financial difficulties, and hope that the information I have provided help you Find. Learn. Save.

Best,

Bill

Bills.com

7 Comments

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  • 35x35
    Jul, 2010
    WebGuy
    Check out these people, www.beforeclosed.com. This adds a whole new meaning to airing your dirty laundry in public.
    2 Votes

  • 35x35
    May, 2009
    Tanya
    The bank is responsible for any taxes owed, but there is no way you will be able to say that the lender is charging you these fees specifically for the purpose of paying off the past due taxes, as they are entitled to charge you fees by way of closing costs. If you are opposed to paying the closing costs, then you just simply have to look for other lenders who would be willing to fund the loans, and the next time around, be sure to specify the terms of the loan that you are looking for.
    0 Votes

  • 35x35
    May, 2009
    Enrique
    Hello, I am a soon to be first time home buyer. The day of signing escrow closing documents, my lender early that day all of a sudden tells me that I have to pay $4,300.00 in closing costs. In my findings on my soon to be home in the internet, there are delinquent taxes that need to be paid in the exat amount. My question is, isn't the bank that owns the forclosed house suppose to pay these delinquent taxes? Also, since when are delinquent taxes added on to closing costs? Might I add I have a VA loan. Are there any california tax codes or laws or also in that case VA as to say who is to pay for these taxes, meaning home title with discrepencies to a cleared home title, transferring from one bank to the other? Any help or info would be great. Ricky G.
    0 Votes

  • 35x35
    Apr, 2009
    Mike
    Since you refinanced your mortgage after the purchase and took out an additional HELOC, you would likely be liable for the HELOC as well as any deficiency balance left on the primary mortgage. Since it was a refinance loan, it will likely no longer be considered a "purchase money loan," which are the only types of loans that are exempt from deficiency balance liability in California. You should consult with an attorney about this situation before you decide how you will proceed.
    0 Votes

  • 35x35
    Apr, 2009
    James
    Thank you for your reply Mike. Please let me clarify my situation. I purchased my home in 2005. I borrowed 80% on the 1st Mortgage, and borrowed 10% on the 2nd mortgages. I think they refered to this type of program as 80/10/10. In 2006, I refied these two Mortgages into one Mortgage and a HELOC(home equality line of credit). Since I live in California, if I go through a short sale, am I still liable for the HELOC? Thanks for your help in advance!
    0 Votes

  • 35x35
    Apr, 2009
    Mike
    A lot will depend on the State laws that govern deficiency balances after a foreclosure. For example, in California, if the two mortgages originated for purchase only and you did not refinance after that, then the loans are 'non-recourse', meaning they have to forgive the balance on the short sale. But in other states, you will still be responsible for the balance.
    0 Votes

  • 35x35
    Apr, 2009
    James
    Hi, Our home is more than $100k underwater. I am the only person working in the family. We have been struggling to pay our mortgage for many month now and find it harder and harder to keep up with our mortgage obligation. I am considering the shortsale option. I have a 1st mortgage and a Home Equality Line of Credit in which I owe $72500.00. If I go through with the short sale process, am I still liable for the $72500.00 line of credit? Any comments is appreciaed!
    14 Votes