Ido Stern Law Blog

Much of the public is under a misconception regarding the foreclosure process. They think that if they can no longer afford to make their mortgage payments, they can simply return the keys to the bank and shake hands. If only things were that simple. In almost every final judgment of foreclosure the judge gives the bank, as necessary, an entry of a deficiency judgment against the borrower. (Please See Fla. Stat. ch. 702.06) A deficiency judgment is a judgment lien borrower whose sale did not produce sufficient funds to pay the mortgage in full.

When a property is sold at the public foreclosure sale performed by the county, few people bid for the property because the winning bidder must pay the winning bid price in full by the end of the day. Therefore, very few properties are actually purchased at the public foreclosure sale and the lender almost always ends up with a deficiency judgment against the borrower. This can create a serious problem because as the borrower begins to rebuild his life, the bank can execute its judgment and perfect its lien in collecting the deficiency. The borrower must be proactive and protect himself and his future from this type of judgment.

Another potential pitfall for borrowers that have been involved in a foreclosure proceeding is the potential income tax burden on the discharge of the debt. When a borrower does not repay the loan to the lender, the lender is required to issue the borrower a Form 1099-C, Cancellation of Debt. This can be a nightmare for any borrower. However, recently the Federal Government has intervened and legislated The Mortgage Forgiveness Debt Relief Act of 2007. This act allows individuals to exclude from gross income any discharges of qualified principal residence indebtedness. This is great news for people involved in a foreclosure between 2006 and 2010 but most people do not know that the IRS requires Form 982 to be completed.

The two issues mentioned above are very serious and must be addressed by anyone involved in foreclosure proceedings. Even though the borrower does not intend to defend against the foreclosure claim, the borrower must be proactive and protect himself from these potential financial dangers.

--Ido Stern, JD

Labels: Foreclosure