I’ve decided to reach into the MichaelEmilio.com mailbag and pull out an email a reader sent in reading foreclosures. Let’s read the email:
“i was wandering in the foreclosure process when the house is sold at public auction and sells for less than what is owed, say i owe 120000 and they only sell it for 50000 what happens to the remaining balance can they garnish wages or take real property such as vehicles or no i am concearned” – Mike D.
So Mike D. wants to know about foreclosures, specifically what happens to the amount left over after a foreclosure sale. Let’s say he owes $120,000 on his house and the house is sold at a public auction for only $50,000. What happens to the money left over? What happens to that $70,000? Does the bank pay that shortfall? Does the original owner pay that amount? Does the new owner of the home pay the amount?
Bank is in control
In most cases, the bank has the power. The bank has the option to file a lawsuit against the original owner for the money that they could not collect at the foreclosure sale. In the hypothetical scenario that Mike D. brings up, the bank can have the ability to sue the former owner for that $70,000 they couldn’t collect at the auction. The bank is able to collect this money through collection actions and a court judgment.
You’re also going to want to look at your particular state’s code. Some mortgage contracts are worded without recourse, this means the sale is final, and the original owner owes nothing else. If the mortgage contract is worded with recourse they may go after the homeowner for the debt shortfall. California, among other states, usually do not allow recourse mortgages.
Keep in mind I’m not a tax attorney, so you’re going to want to set up an appointment with a tax lawyer in your area, but the former owner should know that will now have a tax liability on their hands. I know what you’re thinking, “I just lost my home and now I gotta pay the IRS?” Yes, unfortunately. That foreclosed debt you have of $120,000 that the bank sold at auction is now counted by the Internal Revenue Service as income. What this means to you is that you’re going to have a big chunk of change you’re going to have to pay as income taxes. Unfortunately, this can lead many people to bankruptcy especially when dealing with large mortgages. Put it this way, if someone can’t pay off a home, it’s going to be really hard for them to pay off that income tax they’ll have to pay the next year.
Truth of the foreclosure situation
The reality of the foreclosure situation in general is that the homeowner, while not at fault, does have the responsibility to pay the mortgage debt in full. If these payments aren’t met, then foreclosure happens. And if the foreclosure proceedings don’t provide the solution that the bank was looking for (auction where the house sells for the amount of debt owed) then the former owner is still responsible for that debt left over. The only way to get out of this tricky foreclosure situation is either file for bankruptcy or come to an agreement with the lender. This may allow you to discharge your debt – contact a reputable attorney for this.
On the bank’s side and point of view, note that they have a fiduciary responsibility to the former owner and investors to get as much money out of the sale of the home as possible. As a result, they can sometimes try way too hard! Owners, knowing that their property may go into foreclosure, stop maintaining their property and can often leave the house in bad condition, such as damaged appliances and damaged walls. Home then goes vacant, vandals come in, spray paint all over the walls and the home value plummets downwards.
If interested in buying foreclosed properties, keep in mind that banks don’t like selling foreclosed properties for a rock-bottom price unless they’re forced to. Banks often refuse to sell a home for a reasonable price offer. Then a few months later the house has major damage due to a hurricane and then sells a year later for much less than if they would’ve accepted that reasonable offer way back.