HOW FORECLOSURE WORKS
THE FORECLOSURE PROCESS
If your are currently behind on your house payments, and in danger of foreclosure, you have a limited time to solve your situation. The foreclosure timetable looks like this:
Payment NOTICE OF DEFAULT NOTICE OF FORECLOSURE
60 Days Late RECORDED TRUSTEE’S SALE
_____________X____________________________X_______________X
3 months 20 days X = 110 days
1. What Happens When Your Lender Forecloses
If you got into, or were duped into, a negative am, fixed variable, or adjustable loan rate on your mortgage which is coming due, or past due, you may be eligible for a modification of your loan through a workout with a lender. A loan modification would lower or fix your interest rate, reduce the principal on your mortgage balances, or roll over any delinquent payments on the end of the loan, enabling you to keep your house. Many people who allow their house to go in foreclosure not only face having a foreclosure on their record, they face an unknown danger of adverse tax consequences as a result of a foreclosure. Under IRC Code se. in a foreclosure may result in a taxable gain for you because it as treated as forgiveness of debt. How it works is like this: Let’s say you have a house that was worth $500,000.00 that is now worth say, $325,000.00. You have a first in the amount of $400,000.00 and a second with a balance of 100,000.00. Your real estate broker got in you in to your dream home on a 100%, income stated, fixed variable with “Great Bargain Mortgage Company.” Its an 80-20 loan, and its a 2-28 or 3-27, and now the interest rate, instead of being 5 and 7%, is now 6-1/2 and 9%, and your payments are now $1,000.00 to $1,500.00 more a month. Between the rising cost of living, child care, groceries, you simply can’t afford it anymore and eat too. The problem is that if you walk away from the house, the 1st forecloses and the 2nd, the junior lien is wiped out. There is no deficiency on the 1st because of the anti-deficiency laws found in CCP 580b and 580d, and the “one action rule” in CCP 726. But the second mortgage (even though it’s owned by GBMC) can now sue you individually, because they are a foreclosed junior lienholder. It doesn’t matter that they’re the same lender as the 1st and it was a package deal. Ah, but it gets better!
2. The Ticking Tax Bomb
There’s another bomb that’s waiting to go off. If the lender charges off the loan, this “forgiven debt” is treated by the IRS as ordinary income to you, and instead of owing $100,000.00 to the bank, you now owe the IRS, ordinary income tax on $100,000.00. It’s a gift that keeps on giving. When your real estate broker got you into to this loan, he probably told you that don’t worry about the adjustable interest rate, when real estate prices go up, we’ll just refinance you and get you into a low rate, fixed interest loan. Unfortunately, your broker left out all the other little details, and he didn’t have a crystal ball predicting the economic future of the real estate industry or the economy in general. So your dream house has now officially become your nightmare. Your choice is to file bankruptcy, and get rid of all your unsecured debt, like credit cards and medical bills. It doesn’t get rid of the secured debt, however, and it doesn’t change the terms of the loan. In a Chapter 7, a secured debt is not discharged, and you cant strip off a junior lien. If you file Chapter 13, you may be able to strip off the 2nd, but that’s if you qualify and make the payments into the plan for the appropriate period.
