2 Effects Foreclosure Can Have On Your Finances
Losing a home to foreclosure is never a good situation to be in. Not only does foreclosure cause you to have to move out and lose the place you have been living, but it can also have devastating effects on your finances. You may think that once your lender foreclosures, you will be completely free from the debt tied to this house. Unfortunately, though, this is not always the case. Here are two effects foreclosure can have that you should be aware of.
You Will Pay Taxes For The Loss On The Sale
The first thing is that once you lose your home to foreclosure, the lender will try to sell it. While lenders try to get as much as they can from selling foreclosed homes, there are times when they have to take losses on the sales. A lender would much rather take a loss on a house than have to care for and maintain the house for months or years.
The difference between what you owe the lender for the house and the amount they sell it for is called a deficit, and the deficit amount is taxable. The IRS views this as income, so you can expect to pay higher taxes when you file your taxes after the foreclosure occurs.
You May Owe Money On The Deficit
The other thing to realize is that after a foreclosure occurs, there is a chance the lender may come after you to pay for the actual deficit, and this can be a lot of money. For example, if you owed $100,000 on the house and the bank sold it for $70,000, the bank might send you a bill in the mail for $30,000 (the difference in these two amounts). This $30,000 represents the amount of money the bank lost on your house, and they may even add fees to this.
What You Can Do About This
There is not a lot you can do to get rid of claiming the deficit as income on your taxes, but you can get out of paying the actual deficit amount by filing for bankruptcy. This is a type of debt that can be included in a Chapter 7 bankruptcy, and it will be completely forgiven if you use this option. This may be the only option you have if you do not have the money needed to pay the bill.
If you are not sure what to do about your house, contact a bankruptcy lawyer to see if filing for Chapter 7 bankruptcy would help you in any way.