Judicial Foreclosure Process- what banks don't want you to know

[Wendell De Guzman]

If you are currently in foreclosure or know someone who is, share them the image and information below.

The good news is - you can stay in your home in foreclosure for up to 220 days (this is true only for judicial states) after you fall behind on your mortgage.

However, the bad news is - you can't just ignore your foreclosure or abandon your house and give the keys to the bank. Why?

Because, if your house gets foreclosed on, three bad things can happen:

1. You will lose your house

2. Your credit goes down the toilet (a foreclosure is worse than a bankruptcy by the way); and worst of all...

3. You can get a deficiency judgment (if the house was sold LESS than what you owe, the bank will still go after you with a judgment for the difference!) or the bank can issue you a 1099 for the deficiency (and now you owe the IRS taxes on it)

There are solutions. If you want to save and keep your home, loan modification is one way to do this. You should NOT pay a company to do loan mod. You can do it on your own. Another way to save and keep your home is by fighting the case in court (you can do it on your own or hire a foreclosure defense attorney: but do your research first on who is the best attorney to hire).

If you want to start over and you don't care about moving, shortsales or deed in lieu are better solutions to a foreclosure and getting evicted out of your house. Some banks can even pay you to move out (cash for keys). The key in taking advantage of these alternative-to-foreclosure solutions is to start the process early. How early? Once you are in the "In-Foreclosure" stage (see below), you should start.

Bottomline: if you address your foreclosure early, you might even avoid losing your home, your credit won't go down as much and you can avoid a deficiency judgment (or paying your bank money even after they foreclose and get your home!).

(By the way, if the image below is not clear, email me and I will email you the image below).

[Dion DePaoli]

Wendell some of these claims are simply unfounded and not accurate.

Telling a borrower they can stay in their home for 220 days is not universal for all states, even in all judicial foreclosure states. Albeit, you are not defining what "...after you fall behind" means, which is not an industry term used for any measurement. After they fall behind 1 payment or 12 payments? In Iowa the entire judicial foreclosure process could take less than 190 days. I could list several other similar states.

Secondly, you actually can ignore the foreclosure, but that I agree is not a good idea. Also, you absolutely can simply give them the keys, which you later in your post offer as a strategy, so that just didn't make sense.

"A foreclosure is worse than a bankruptcy"; that is simply a matter of opinion and really has no factual answer. A bankruptcy will stay on your credit for 10 years. A foreclosure will stay for 7 years. So if "worse" is amount of time listed on credit, then BK is worse. Both events can be recovered from and credit can be repaired and even a new loan can be obtained in similar times and actions. So in those cases, they are pretty similar.

A mortgagee can only seek a deficiency judgement if the state the property is in allows deficiency judgements, first and foremost. From state to state the laws are different. Some states have carve outs on allowable deficiency filings even if they are allowed. And a mortgagee seeking a deficiency does not automatically mean a deficiency is granted. The borrower can defend themselves. Further, not all mortgagee's pursue deficiencies due to the cost of the legal proceeding and the probability of recovery of any judgement. Let's not forget that a loan must also be recourse in order for this to even be something to talk about, provided most but not all residential loans are recourse loans.

You wrote, ".....or the bank can issue you a 1099 for the deficiency (and now you owe the IRS taxes on it)" That is not really the whole correct picture. What you are trying to talk about is the forgiveness of debt which is not the same as deficiency at all. In fact it is the opposite. Seeking a deficiency is to make the borrower pay for the shortfall on the asset between debt balance and liquidation proceeds. If you have a deficiency judgment against you, you have to pay the debt back, which is the point of a deficiency. There is no taxation on paying debt back in the IRS code. The forgiveness or cancellation or discharge of debt can be taxable. If you borrower $100k and don't pay it back and the lender discharges or cancels the debt, that is income in the eyes of the IRS. The IRS allows for primary residence discharged debt to be excluded from income reporting with certain thresholds for single and two income households, which was up to a maximum of $2.0 Million for dual filing and $1.0 Million for single filing taxpayers.

Are alternatives to foreclosure better? Sure, that is why they are alternatives. Better how? Is a matter of opinion. Short sales and Deed in Lieus can be just as damaging on a person's credit report as a foreclosure. There is no way you can claim that by doing one thing sooner opposed to later that a person's credit will not go down as much. The impact on personal credit will have much to do with the total credit profile of the person. The impact of one negative trade line is not universal for all people. If the mortgage is the trade line, the impact might be large. If there multiple other trade lines still in good standing, the impact of the foreclosure might be mitigated.

Additionally, there are many states which require mediation and specific conversations around alternatives to foreclosure by the mortgagee. A borrower does not need to have an attorney present for this meeting but a borrower can get representation whenever they desire.

All that said, what is it that banks don't want borrowers to know about foreclosure? What is the secret implied in the title of the thread?

I don't think there are any. There is no, and never has been any secret to any of this. That said, let's make sure we properly educate the folks who come to this forum seeking Help or Advice on Foreclosure by not confusing them, scaring them or giving them inaccurate information.