Many householders in California as well as across the USA, are confronted with the unfortunate scenario of having a property that is underwater. Progressively more property owners cannot continue to make the obligations on their home as well as must look to the top options for eliminating their home finance loan debt and surrendering their house.
1. Foreclosure - If your mortgage company decides to foreclose on your property, your personal liability may be removed if you meet three requirements. Under California law, if the home mortgage loan was taken out to purchase the home, you live in the home, and it is a residential property (4 or less dwellings) then the lender cannot seek a deficiency judgment against you. If you have refinanced your home you fall out of the scope of this law and could be help personally liable for the deficiency (difference between what is owed on the mortgage loan and the value the home is sold for).
Another law that protects you involves the sale of your home through non-judicial foreclosure. If the mortgage company foreclosed on the property through a trustee sale (non-judicial foreclosure) then they cannot also seek a deficiency judgment against you. Under California law once a lender decides to proceed through a non-judicial foreclosure (foreclosure without court proceedings) then they are barred from seeking a deficiency judgment against you.
If you fall in these two categories then the lender cannot proceed to get a deficiency judgment against you. The problems arise in the potential tax consequences from the foreclosure of your home. The debt that is canceled from the foreclosure sale (based on the difference between the mortgage loan amount and what the home is sold for) can result in a tax liability. The difference between these amounts is viewed as taxable income to you. If you qualify under the Mortgage Forgiveness Act of 2007 you would be able to avoid this tax liability. Under the act if the loan was taken out to purchase your personal residence or improve the home, or if you were insolvent at the time of the foreclosure then your tax liability can be removed. The act applies to debts forgiven in years 2007 through 2012.
2. Short Sale - Under a short sale the lender agrees to the sale of the home for less than the mortgage note, in exchange generally for releasing the mortgage. Short sales are disadvantages for a number of reasons. If you qualify under California's anti-deficiency statue, which prevents a lender from pursuing you for the remaining balance on the home after a foreclosure, then a short sale is not a good option. If you have completed a short sale you fall outside the scope of this law (the law is seen as applying to judicial and non-judicial foreclosures) and can possibly held liable to the unpaid balance or if they forgive the remaining balance you could be looking at a tax liability. If the lender treats the remaining balance as canceled debt than you would have to examine whether you can remove your tax liability through the Mortgage Forgiveness Act.
3. Bankruptcy - In California, your personal liability for your home mortgage can be discharged in a Chapter 7 and Chapter 13 bankruptcy. When a debt is discharged in bankruptcy, your personal liability is removed. Filing for bankruptcy to remove your personal liability from your home mortgage avoids first the tax consequences associated with any debt cancellation. Debt that is discharged in bankruptcy is exempt from income tax liability. In addition once you file for bankruptcy, the lender legally should not report any future items on your credit report (including the foreclosure of your home), since your personal liability will be removed once the debt is discharged in bankruptcy.
A homeowner should review all of their options in each of these areas before deciding what is the best option for them. Please obtain the advise of an attorney to get further clarification on removing your personal liability from your home mortgage loans.
1. Foreclosure - If your mortgage company decides to foreclose on your property, your personal liability may be removed if you meet three requirements. Under California law, if the home mortgage loan was taken out to purchase the home, you live in the home, and it is a residential property (4 or less dwellings) then the lender cannot seek a deficiency judgment against you. If you have refinanced your home you fall out of the scope of this law and could be help personally liable for the deficiency (difference between what is owed on the mortgage loan and the value the home is sold for).
Another law that protects you involves the sale of your home through non-judicial foreclosure. If the mortgage company foreclosed on the property through a trustee sale (non-judicial foreclosure) then they cannot also seek a deficiency judgment against you. Under California law once a lender decides to proceed through a non-judicial foreclosure (foreclosure without court proceedings) then they are barred from seeking a deficiency judgment against you.
If you fall in these two categories then the lender cannot proceed to get a deficiency judgment against you. The problems arise in the potential tax consequences from the foreclosure of your home. The debt that is canceled from the foreclosure sale (based on the difference between the mortgage loan amount and what the home is sold for) can result in a tax liability. The difference between these amounts is viewed as taxable income to you. If you qualify under the Mortgage Forgiveness Act of 2007 you would be able to avoid this tax liability. Under the act if the loan was taken out to purchase your personal residence or improve the home, or if you were insolvent at the time of the foreclosure then your tax liability can be removed. The act applies to debts forgiven in years 2007 through 2012.
2. Short Sale - Under a short sale the lender agrees to the sale of the home for less than the mortgage note, in exchange generally for releasing the mortgage. Short sales are disadvantages for a number of reasons. If you qualify under California's anti-deficiency statue, which prevents a lender from pursuing you for the remaining balance on the home after a foreclosure, then a short sale is not a good option. If you have completed a short sale you fall outside the scope of this law (the law is seen as applying to judicial and non-judicial foreclosures) and can possibly held liable to the unpaid balance or if they forgive the remaining balance you could be looking at a tax liability. If the lender treats the remaining balance as canceled debt than you would have to examine whether you can remove your tax liability through the Mortgage Forgiveness Act.
3. Bankruptcy - In California, your personal liability for your home mortgage can be discharged in a Chapter 7 and Chapter 13 bankruptcy. When a debt is discharged in bankruptcy, your personal liability is removed. Filing for bankruptcy to remove your personal liability from your home mortgage avoids first the tax consequences associated with any debt cancellation. Debt that is discharged in bankruptcy is exempt from income tax liability. In addition once you file for bankruptcy, the lender legally should not report any future items on your credit report (including the foreclosure of your home), since your personal liability will be removed once the debt is discharged in bankruptcy.
A homeowner should review all of their options in each of these areas before deciding what is the best option for them. Please obtain the advise of an attorney to get further clarification on removing your personal liability from your home mortgage loans.
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