Consequences of Foreclosure in California
To understand the consequences of foreclosure, it’s important to know what Foreclosure means.
Foreclosure, a legal process enabling your mortgage holder (i.e: Wells Fargo, Bank of America, Chase, IndyMac/ One West Bank, etc.) to cancel a Borrower’s “right of redemption,” or one’s right to buy back their property after it’s been foreclosed on for non-payment, on the mortgaged property through the order of court, also known as the Foreclosure Order.
Tax can have a significant bearing on foreclosure.
Circumstances may differ in different cases; however, generally there are two types of taxes that are applicable on foreclosure: 1) income tax and 2) capital gains tax.
Income tax/ Deficiency Judgement
The deficiency arising out of the amount recovered by the lender and the amount of mortgage you still owe is considered as taxable income at the time of foreclosure. For example: if your total amount owed to your lender is $500,000 and the property is sold at auction to the highest bidder for only $450,000, you as the Borrower may be taxed on the $50,000 “loss”. This may not be true if the following deficiency arose out of loan taken for either improvement on the principle home or for acquisition. This exception is granted under the Mortgage Forgiveness Debt Relief Act 2007.
If the proceeds from the sale of the property at a foreclosure auction are higher than the cost of the property, then it gives rise to capital gain. To make it clearer, here is a simple example. For instance, if you bought the house for $400,000 and it is sold at $600,000, clearly the capital gains would be $200,000, less (minus) the expenses incurred on improvements, if any, done on the property. This capital gain will be taxed on the Federal Capital Gains Tax Rate of 33%, resulting in your total tax amount due of $66,000 if you within 12 months of purchase OR $30,000 if you sell AFTER 12 months from date of purchase (these are rates for 2015). You can take help of tax advisor to find out your capital gains and related issues on the foreclosure of your house.
Loss of property permanently
Normally, a certain period is granted by the lenders to borrowers before the foreclosure for giving them the chance to redeem the property by paying off the mortgage in full. However, in California this right of redemption is non-existent on non-judicial foreclosures (foreclosure proceedings requiring no court confirmation before the sale of the property to recover an unpaid debt). Since, in California non-judicial foreclosures are common, only a few homeowners have the opportunity to reclaim their property after foreclosure… even if their financial position is strong enough to afford it.
If the home bears any additional lien(s), excluding the mortgage lien, all other liens are wiped out at the time of foreclosure, a process known as “lien stripping.” But this does not mean the debts behind that lien are wiped out as well. Post-foreclosure, lien holders may still be able to sue the borrower and force the borrower to forfeit the debt through one of the following means: wage garnishment, automatic fund withdrawal from your bank account, intercept your state/ federal tax refunds, and in some cases, even imprisonment.
Foreclosures have a long term, detrimental effect on your credit worthiness, or FICO credit score. The effect remains hanging like a death toll over your credit report for up to seven years. Not only does it have an adverse effect on you while applying for credit and loans but it also creates difficulties in getting a new home/ mortgage. You will incur resistance in seeking mortgage financing. Also, most landlords ask for an advance payment check as the foreclosure acts as a red flag and casts doubt on your ability to pay, and pay on time.
Foreclosure is always a painful process, no matter what the circumstance. So it is strongly encouraged for you to seek the help of a third-party professional that can make the road to recovery from foreclosure as simple as possible while, empowering you through knowledge of the process and all your available options every step of the way.
If you want to avoid foreclosure and/ or need advice on any real estate related issue, we invite you to reach out to us any time at 510-596-1774 or send us an email to [email protected]. Our seasoned team of Foreclosure Specialists can help in the trickiest of situations to get you the mortgage assistance and debt relief you may need now or in the near future through our simple process and convenient loss mitigation services. Call now 510-596-1774, text in to our mobile customer service support line at 510-761-8677, and/ or visit us on the web at: www.VYCrealtyLLC.com. Good Luck!
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