What happens after Foreclosure?

Many people worry about what happens after foreclosure.  If you are going through foreclosure, it is good to understand what you might still be responsible for or what the bank may due after a foreclosure. We’ll go through what a deficiency judgment is as well as the tax implications.

Deficiency Judgments: Money Banks Seek After Foreclosure or Repossession

Deficiency judgments represent the money due when a foreclosure or other form of forced sale does not produce enough proceeds to cover the debt owed. Given the high debt due under most defaulted mortgages and low real estate values in today’s market, deficiency judgments can be very large amounts, since they are overdue, they are immediately and fully enforceable court judgments.

In most Connecticut foreclosures you lose your house and still owe the bank for the remaining money borrowed, including interest, fees, costs and other bank charges. This is a disastrous result that is widespread throughout Connecticut and in the 40 other states that allow for deficiency judgments.

Any bank that completes a foreclosure with a debt amount due that exceeds the value of the property can bring a Motion for Deficiency Judgment and preserve their right to sue for money “unpaid” if they file it within 30 days of the Foreclosure Judgment.

With real estate values at historical lows, deficiency judgments result from the vast majority of Connecticut foreclosures. It is rare that banks receive enough proceeds from forced and often slow sales to satisfy the large amount of mortgage debt, fees and costs that result from a foreclosure.

Unpaid second mortgages, credit lines or liens are also the personal responsibility of the borrower, even after a foreclosure.

Second mortgages and unpaid credit lines can be very large amounts that are due in full by suit, lien, attachment or other means of court collection. It is important to understand that mortgages or liens that are on your home before foreclosure generally become unsecured Judgments due against the homeowner after the first mortgage foreclosure, even if the first mortgage doesn’t seek a deficiency judgment. Avoiding personal liability for large second mortgages, credit lines and other liens requires experienced counsel with knowledge in all forms of debt relief, including filing for bankruptcy under the revised requirements for Chapter 7 eligibility and relief.

How We Can Help You Avoid A Deficiency Judgment

Avoiding a deficiency judgment should always be pursued with the assistance of a highly qualified Connecticut deficiency judgment lawyer. There are three major ways to avoid a deficiency judgment in Connecticut. Two of the three require bank permission and assistance:

  • Chapter 7: provides full relief from all Deficiency Judgments by discharging personal liabilities in full.  All debts, including other mortgages, liens and court judgments still remaining after a foreclosure are also discharged from personal liability. This allows the post-foreclosure family to proceed forward with a clean slate on foreclosure debt and all other forms of general unsecured debt, including full credit card relief, so the Bank and any creditors are barred from proceeding against you, your assets, or future earnings.
  • Full Discharge under Chapter 7 never requires permission or assistance from your Bank or creditors.  It’s a right provided to you under federal law.
  • Deed-in-lieu of foreclosure: This is the process where, through negotiation, your lender agrees to accept the title to the property in full satisfaction of your debt prior to the end of the foreclosure.  This process should only be used if it assures that the homeowner who gives back their house will have no deficiency still due to the Lender. This is a result rarely ever seen. Furthermore, it is always made more difficult by the involvement of junior liens or credit lines. A deed-in-lieu requires complete cooperation, assistance and permission from all lenders. This option is not always available when dealing with mortgage lenders and servicers, but our attorneys know how to maximize your chances for deed-in-lieu success whenever this option will fully resolve your financial difficulties.
  • Short sale: This is the process whereby the Bank allows you to sell the house for less than the total debt.  A short sale is an important and huge financial decision that should never be undertaken without the advice from a short sale legal representative or an experienced bankruptcy attorney.  Short sales don’t solve other debt problems or tax issues as you leave your home. Never do a short sale that leaves you with a deficiency.  The Bank needs to assure you that the short sale proceeds are taken to satisfy the whole debt. Short sales are uncommon in today’s difficult banking environment where large banks are slow and servicers are unlikely to coordinate all the parties and steps necessary for a successful short sale. Under certain specific circumstances, short sales can be a foreclosure and deficiency solution when properly pursued by our experienced short sale attorneys.


Tax Consequences of Short Sales, Deficiencies and Solutions

Foreclosures create perilous results for uneducated homeowners long after the foreclosure is completed.

Deficiencies resulting from refinances, second mortgages and credit lines can have disastrous tax consequences if any of the borrowings were not utilized solely for the purchase or the improvement of your house. These forms of debt cancellation create taxable income in the form of a 1099-C that can be very large. 

Tax problems created by foreclosures and other debt cancellation can cause long lasting and often unsolvable tax consequences if you don’t seek experienced legal help.  Foreclosure  can be a taxable event. The Mortgage Tax Forgiveness Act was lost in 2018 and 2019, but is due back in 2020, and you need to carefully understand it.  Don’t lose your house and get stuck with a huge non-dischargeable tax debt because you didn’t just make a call and seek legal advice.

Chapter 7 allows for full debt discharge before or after a foreclosure with no tax consequence to the homeowner.  All liability for deficiencies and all other non-tax debt is relieved tax free.  This ensures no post foreclosure obligations and a true fresh start.

Deed in Lieu of Foreclosure can create a serious tax ramification if it is  not properly handled and documented before the date of transfer.  Don’t ever give back a home and create a non-dischargeable tax debt.  This depends on careful and precise documentation.  Get proper legal counsel and never rely on the Bank’s forms or lawyers.

A Short Sale creates a perilous situation for all homeowners.  They’re faced with the loss of the home, the potential for remaining deficiencies liability, and the serious negative effects of income cancellation tax debt.  If done incorrectly prior to the short sale  transfer the ramifications can be serious and long-lasting.  A short sale is a real estate closing with many parties involved – Banks, lenders, brokers, buyers, seller, courts…Get excellent and experienced local short-sale or bankruptcy counsel.  Short sales need to be perfectly coordinated with an experienced attorney working for you.


Recovery After Foreclosure

Unfortunately, many Connecticut residents have lost their homes to foreclosure, very often without the help of legal representation. While the consequences can be dire, there is no question that you still have a road to financial recovery and various legal avenues to completely regain your financial future. Recovery through legal rights granted under Federal law gives foreclosure victims in even the seemingly worst of circumstances a path to recovery after home loss to foreclosure.  To learn how you can create recovery after foreclosure, contact our team of bankruptcy and foreclosure attorneys.  We always offer a free consultation and are available to answer your questions directly by phone at 203-230-2233.

Understand the myths about Foreclosure by reading our 10 Common Myths about Foreclosure article