after foreclosure, can your mortgage company make you pay what they lose in a foreclosure sale?

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I have a first and second mortgage (to avoid PMI) and I am wondering if, after foreclosure, if we are going to be liable finacially for the banks loss, or the difference between our loan balance and what they get in the foreclosure sale? I know that our credit score will be affected, but I am wondering if that is the only repercussion? I also know the laws are different in states I am in Nevada anyone that knows the nevada foreclosure law specifically would be great. I am also wondering once we move out, assuming we do so before notice to evict what role will we, as the homeowners, need to play in the foreclosure process? I have heard that you must fill out a 1099 form for taxes? saying the difference between the amount owed and what the bank gets is roughly 30,000 what would that mean we pay at tax time?

My co-workers and I are having a debate… When your home goes into foreclosure and the bank reposesses the house, are you required to pay back the remainder of the mortgage?

  1. Reply
    Homer J. Simpson
    February 3, 2011 at 1:12 am

    Yes. It is called a deficiency judgement and the lenders will seek it out if they think that they can eventually collect an amount that exceeds the cost of getting the deficiency judgement.

    For taxes, if the lender pursues a deficiency judgement, there are no consequences in current year. However, if the lender just wants to cut its loses and move on and not deal with you anymore, then there are tax consequences. The internal revenue code classifies forgiven debt as income and you will owe income tax on the amount forgiven.

  2. Reply
    February 3, 2011 at 2:09 am

    It depends on your state law. In my state, California, a lender on a purchase money loan can not pursue a borrower beyond the collateral. A lender can approve a short sale where it does not get paid in full and forgives the loan giving rise to income from discharge of indebtedness. You have to balance owing tax on the additional income with less damage to your credit report.

  3. Reply
    February 3, 2011 at 2:46 am

    Wartz, Even in CA, on a purchase loan, I think that lender can still issue a 1099-C for any debt relief.

    You do not have to pay the loss, but you will have to pay income tax on the amount reported IF a 1099-C is issued.

    OP: depending on your tax bracket, it’s $ 30,000 income for that year.

    Govt may change those rules soon.

  4. Reply
    February 3, 2011 at 3:23 am

    Yes, the mortgage company can go after you for difference between the amount of sale at foreclosure and the amount you owe them. This is called a Deficiency Judgment and Nevada does allow for these judgments. Some banks will do this, some won’t. It’s totally up to them.

    The tax implications come from another process that the bank could choose to do. They can choose to forgive the debt you owe to them. When they do this there is no Deficiency Judgment against you. The bank will issue a 1099 form to you and the IRS. This form basically states that you received X number of dollars as income from the bank. This “income” is the amount of money you owed them but they never chose to collect. The IRS treats this as income because the bank, in effect, gave you the money by forgiving your loan. You will then owe taxes on this income. Depending on your tax bracket you could owe anywhere from $ 6600 to $ 10,500 to the IRS for a $ 30,000 forgiveness.

    Just as a note, it’s best to try and work with the bank before they file a foreclosure with the courts. You will save them a lot of hassle if you choose to do a deed in lieu or a short sale. Once it goes into foreclosure court then you are getting yourself in a really bad place.

    This site has the basic information on foreclosure laws for Nevada –

    Good Luck!

  5. Reply
    February 3, 2011 at 3:42 am

    The bank will sell the house for the best price it can get. You are liable for the difference between what the bank can sell it for and what you still owe on it, if any. This amount is called a deficiency.

    The deficiency can be discharged in bankruptcy, either after the foreclosure takes place, or by filing bankruptcy before the foreclosure takes place and surrendering the house in bankruptcy.

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