Friday, January 16, 2015

Foreclosure In Depth




Revised Code of Washington 61.12 Foreclosure

Below is a good plain language summary of Washington foreclosure law.
http://www.foreclosurelaw.org/Washington_Foreclosure_Law.htm

Below are what I consider to be the key point to understand regarding the interplay between bankruptcy and foreclosure.

 Know whether you have personal liability for your mortgage debt.  If you have a home equity line of credit (HELOC) or a 2nd mortgage, then you should assume you have personal liability for the debt. The word mortgage is a commonly understood term that does not distinguish between the two key documents in purchasing a home:  the promissory note (creating personal liability) and the deed of trust (creating the lien on your home, which includes the right to foreclose if you don't pay).

      The legal distinction below is necessary to your understanding:

Personal Liability vs. Liens

Personal liability is the right of a creditor to sue you, obtain a Judgment, and garnish your wages.
Liens (mortgages) are liabilities on the property only, and not on you personally.  It is personal liability that is discharged in bankruptcy.  Liens are unaffected. (Except in certain cases.  See Lien Strippping and Cramdown.)

So, it matters if you have a single purchase money mortgage that you have never refinanced or if you have refinanced or have a HELOC or 2nd lien of any kind. For homeowners with only one original mortgage, if the bank forecloses the bank is limited to the price received at the foreclosure sale (assuming a non-judicial foreclosure), and cannot sue you for the deficiency (the difference between what you owe and the foreclosure sale price).  This bar against collection against you personally is referred to as "Non-Recourse."

However, lenders do have recourse against you personally for a HELOC or 2nd lien.  This means after the foreclosure sale, you can expect to be sued for the balance.  It is this creditors right of recourse against you personally that commonly triggers bankruptcy.

WARNING REGARDING TAX IMPLICATIONS

Consult your CPA regarding claiming exemptions to the general rule of tax liability regarding foreclosures. I am not a CPA and cannot give tax advice.  I try to learn enough about taxes to warn clients about questions they should ask their CPA.

Below is a link to the IRS web site with answers to common questions about bankruptcy, foreclosure and other issues.
http://www.irs.gov/uac/The-%E2%80%9CWhat-Ifs%E2%80%9D-for-Struggling-Taxpayers

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