Foreclosure State Law Basics

Foreclosure laws vary from state to state and if you are facing foreclosure, you should be aware of what the laws are in your state.  There are several pieces of information about foreclosure that you should be concerned about if you are facing foreclosure.

Judicial vs. Non-Judicial Foreclosure

There are two types of foreclosure, judicial and non-judicial.  Judicial foreclosure requires the lender to file a lawsuit and obtain a court order before it can seize and sell the property.  Judicial foreclosures are very lengthy and costly to the lender.

Non-judicial foreclosures, also known as power of sale foreclosures, do not require the lender to obtain a court order to foreclose.  Non-judicial foreclosures are auction type sales that usually take place on the courthouse steps of the county in which the property is located with the property being sold to the highest bidder.  If there are no bids, the lender is automatically deemed to be the highest bidder.  As long as the lender gives the borrower the appropriate notice as required by the laws of the state in which the property is located and conducts the sale in accordance with state law, a non-judicial foreclosure will not be set aside.  A non-judicial foreclosure can take place in as little as two to three months after the borrower defaults.

Deficiency Judgments

In some states, lenders are allowed to seek a deficiency judgment against a borrower after it forecloses.  If the lender sells the property at a loss, it can file a lawsuit to recover the short fall from the borrower.  For instance, if the borrower owes $100,000 on the mortgage and the lender sells it for $75,000 at the foreclosure sale, it can seek a deficiency judgment of $25,000 against the borrower.

Because of the cost and time involved in obtaining a deficiency judgment and the very small chance of actually recovering even a portion of the deficiency judgment from the borrower, most lenders don't pursue them.  In some situations, such as where mortgage fraud is suspected, the lender may choose to pursue a deficiency judgment.

Redemption Rights

Some states give a borrower the right to redeem the property after a foreclosure.  In order to redeem the property, the borrower must bring the loan current, including payment of any interest and late fees, and pay the lender's attorney's fees and costs. Generally speaking the redemption period is one year from the date of the foreclosure, but it may be much shorter.

Tax Consequences of Foreclosure

Generally speaking, the IRS treats foreclosure as a form of debt cancellation and treats the amount so cancelled as taxable income to the borrower. However, under the Mortgage Forgiveness Debt Relief Act of 2007, qualified indebtedness on a primary residence which is forgiven in calendar years 2007, 2008, 2009, 2010, 2011, and 2012 is not taxable.

Qualified debt is debt which was used to buy, build, or substantially improve a primary residence.  Additionally, refinance debt is considered qualified debt as long as the original loan it replaces would have qualified.   Up to $2 million dollars ($1 million for married borrowers filing separately) of forgiven debt  is eligible for the exclusion.

• If you may be facing foreclosure or already in the process, Consult Your Case for Free with a local certified Foreclosure Attorney to see your best options you have available to avoid Foreclosure.