If you have recently lost your home through foreclosure, you might be confused about the procedure you need to follow when filing your taxes.  You probably realize that there are tax consequences of foreclosure, but you are not sure what they might be.   Following is some useful information for you to consider as you prepare to file your yearly taxes after a foreclosure.

In general, there are two possibilities of consequences that you should consider.  First of all is the taxable cancellation of your debt income.  The second is a reportable gain from the home disposition.  This second consideration is because foreclosure on a home is treated the same as a sale, simply for tax purposes.  It would be important to note at this point that usually most of the gain - if not all - from the sale of domestic residence qualifies you for exclusion from your income.

If you are still trying to figure out what your exact income is that needs to be reported from your foreclosure, you can follow these two simple steps.  First, you need to figure the cancellation of debt income.  Take the total of the debt you owed directly before the foreclosure occurred.  Next, take what the market value of your property was at the same time.  Deduct the first from the second.  This will be your cancellation of debt income.
The second step is to figure your gain from the foreclosure.

Once you have figured these two amounts out, you will know what your tax consequence is.  If you are unsure about filing your taxes, especially after something as financially changing as a foreclosure, it is advisable to consult your accountant, preferably the one who usually handles your finances and taxes.  They will be able to walk you through the process should there be further confusion.

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Foreclosure happens when the owner of a property is unable to make payment of either the principal and/or interest on the loan obtained for that property.  This generally leads to seizure and selling of the said property by the lien holding company; this process is known as foreclosure.  Of course, there are several steps involved in this process, which can be summarized in three easy steps.

STEP ONE:  NOTICE OF DEFAULT
The lender orders a Notice of Default to be submitted after three to six months of missed payments.  This alerts the borrower to the fact that he/she could be facing foreclosure should the amount in arrears not be settled immediately.

STEP TWO:  ESTABLISH A FORECLOSURE SALE DATE
If the default is not met (loan to be settled to current), the homeowner will receive a notice of sale with the foreclosure sale date.  This will be the date the home will be put up on public auction and sold to the highest bidder.  This notice of sale and the established foreclosure sale date will be made publicly known through three weeks of newspaper announcement as well as on the steps of the county court house in the county where the home is located.

STEP THREE:  FORECLOSURE AUCTION
This is the final step in the home or property being seized by the lender.  The property is auctioned off in a public auction to the highest bidder.  That person would be required to put a deposit down at the beginning and have the rest within 24 hours.  This ensures the mortgage holder that payment is imminent.

While this is a brief synopsis, you can see that the process of foreclosure is actually not that difficult to understand.  There is a wealth of detailed information available should you require further details regarding these procedures.

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There are generally two different types of foreclosure in most of the common law states within the United States.  These two types of foreclosure are known as “strict foreclosure” and “non-judicial foreclosure.   When strict foreclosure is used, the lender claims back full possession of a property as full satisfaction of the unmet debt.  Once this has been done, the house or property is then subject to auction by court-order.  During an auction of a foreclosed property, banks or other lenders can bid up to the amount of the debt that is owed.  However, there are several other factors that can influence the amount of the bid by these institutions.  If no other buyers step forward at the auction, the lender will receive the title in return.

While strict foreclosure has become a common practice in many states, other states have chosen to use the non-judicial foreclosure procedure.  In this procedure, the debtor is issued with a notice and the lender’s intent to sell the property should the debt not be satisfied within a given period of time.  This is more commonly referred to as statutory foreclosure.  After the notice has been served and the given amount of time has passed, the property is then put up on auction, following similar procedures as with the auction during strict foreclosure.

There are a few other types of foreclosure being used in various parts of the United States.  These are few and uncommonly used procedures.  Strict foreclosure and statutory foreclosure are the two most common types of foreclosure used, with strict foreclosure being considered the “original” procedure for foreclosure.  Statutory foreclosure was developed to give the debtor a bit more time and leniency in catching up the default of payment.  Each state functions differently and it is important that you know the laws and practices of your state.

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If you are facing foreclosure on your home, you have no doubt been looking for ways to save your home as well as researching your rights as well as your options and alternatives.  A short sale is probably one of the options you have considered - or are considering.  However, it is important that you understand what you would be agreeing to with a short sale.  Following are a few principles for you to consider and understand before making any big decisions regarding short sale.

The term short sale refers to a sale of a piece of real estate in which the profit from the sale falls short of the actual balance that is owed on the loan of that property.  With a short sale, the bank or other lien holder will agree to sell the property at a discount because of financial hardship experienced by the borrower.  This is one method used to stop a home foreclosure from happening.  However, the final decision about whether or not to proceed with a short sale is left up to the mortgage company, bank or other lien holder.  The bank will decide what it thinks is the most economic means of recovery on the amount of the property.  If they believe a short sale will result in a smaller fiscal loss than a foreclosure would incur, they will allow the short sale.

So, how do you decide if a short sale is the right way for you to go?  It is important that you weigh all of your options.  Realize that none of the options will be easy for you and choose the one that will carry the least amount of consequences for you and your financial future.  Your decision will heavily rely upon whether or not your bank or lien holder will even allow the short sale.

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If your house is up for foreclosure, you might be feeling hopeless and out of options.  However, you still have options and not only that, but you also have rights.  It is important that you acquaint yourself with all the laws regarding foreclosure in your state, as well as what your rights are regarding foreclosure and the avoidance thereof.

First of all, foreclosure is the procedure by which a bank, mortgage or other lien holder takes action against the borrower who has fallen grossly behind on their monthly payments.  Foreclosure is generally a process and not a single event that comes unexpectedly.  This process can be a fast process or it can be drawn out to become a long process - the length of the process depends upon the circumstances surrounding the foreclosure as well as which state you are located in and the specific laws governing that state’s foreclosure procedures.

Some of the ways you can avoid foreclosure is through refinancing, alternate financing, making temporary arrangements with your lien holder or lender.  Some homeowners even file for bankruptcy in order to avoid foreclosure.  Another option that has seen a recent growth in interest is through websites which bring borrowers into contact with lenders.  These lenders then provide the payment obligations of the mortgage companies and in essence, bypass the original lender.

The most important thing to realize is that you have options and you have rights.  Foreclosure does not necessarily have to be the end for you and the home you love.  You will be able to find a plethora of information on the internet regarding the foreclosure laws which are specific to your state.  With just a little bit of research you will be able to arm yourself with the information you need to know to save your home and your lifestyle from foreclosure.

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FORECLOSURE AND YOUR CREDIT REPORT

Your credit report is instantly updated the moment you make an inquiry or when you are late in making a payment to any creditor, whether it is your mortgage company, car loan bank or credit card company.  Everything you do -or don’t do - regarding your credit directly effects the credit rating that you have.  For a homeowner, your credit report score is affected even with one month’s missed payment.  Your credit report will experience negative feedback regarding foreclosure if you have missed payments for 30 to 90 days.

If you have gotten to the point with your home loan that you are receiving information regarding a potential foreclosure, chances are pretty good that your home loan is not your only credit company that you are behind payments with.

The immediate impact of a foreclosure on your credit report is projected to be between 100 and 140 points.  Even if all you have done so far is a “deed in lieu of foreclosure”, the report will be the same as an actual foreclosure on your credit score.  Most experts will tell you that a foreclosure stays on your credit record for seven years but you must realize that it can actually stay longer because it is part of a public record.  This can be open for 20 years!  When the time comes for you to restore your credit report, be sure that you have the foreclosure information completely removed from your record.  Even if your credit is restored but the foreclosure remains there, future lenders and creditors will have access to this information.  It will be unfair for you, the borrower, should you choose to borrow again at a later stage, if the creditor still refuses you credit because of a foreclosure that might have happened years ago.

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Foreclosure is almost always an action in equity; the reason for this is because the redemption rights are equitable rights.  In an effort to keep the redemption rights, the debtor can solicit the help of the equity court and request an injunction.  If the property is imminently going to be repossessed by the lien holder, the debtor will need to ask for a temporary restraining order to buy more time.  In this case, the debtor could also be required to post a bond in the full amount of the debt that is owed.  This bond is put into place to protect the lien holder in case the endeavor to stop the foreclosure is actually an attempt to skip the debt and cheat the lender out of the money.  While this is not always the case, the bond posted is just a measure of security for the lien holder.

Another option that the debtor has in contesting a foreclosure is to challenge the authority of the debt.  This would be in the form of a claim which is laid against the bank or mortgage company to stop the proceedings of foreclosure and sue the bank for damages.  In typical foreclosure proceedings, the lender must prove that there is a valid debt.  The procedure at this point will be a court case in which both the debtor and the lender will have to present their cases.  The equity court judge will determine who is right in this situation.  The end result will be the determination of the judge in this case.  The judge has the right to demand that, either the debtor must pay the full amount of the loan within a given period of time or the lender will have to stop foreclosure proceedings and continue with the original mortgage terms as agreed when the mortgage was opened.

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Bankruptcy is one of the legal options for avoiding foreclosure.  While it is a legal option, the question you must ask yourself is whether or not it’s worth filing for bankruptcy?  Or, would it be better to foreclose on your house?  Allow us to examine the two options.  The important thing is that you are able to make the best informed decision possible.  Only you know what will be better for you and your circumstances.

The bottom line when trying to decide between bankruptcy and foreclosure is that neither option is the “easy way out”.  No matter which route you choose, there will be difficult consequences that you will have to bear.  For example, a foreclosure usually remains on your credit record for seven years while bankruptcy stays for 10.  This is not to say that foreclosure is definitely the best option.  Experts say that mortgage lenders will usually look first on a credit record for a foreclosure before they would look for a bankruptcy that didn’t include the house.  This is something to consider if you think you will want to apply for a mortgage in the next 7-10 years.

You might be tempted to accept the fact that foreclosure is your only option at this point.  However, expert advice at this point in time, considering the global financial crisis, it would be better to avoid it.  The first thing you should do, whether you are only one or two months behind on your payments or you are several months behind, is to contact your mortgage holder before they take the process further.  This is still recommended even if you have already received a “notice of default”.  You still have time to make a plan to get back on track with your mortgage payments!

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The idea of “acceleration” is used in foreclosure proceedings to establish a certain amount that is owed to the lender by the debtor.  This process allows the mortgage holder, whether it is a bank or another lien holder, to claim back the entirety of the debt that is owed and payable if the contractual agreement for payment has been broken.  Most mortgage contracts make room for acceleration clauses, which actually work to protect the investments of the mortgage holder or lien provider.  If the mortgage holder does not have this clause included in their mortgage contract, they have only two options for repayment: first option is to wait until the time has come when payments are due; second option is to compel a court to force a sell of some of the property to make up for the past due payments.  Additionally, the court has the right to order the property to be sold in conjunction with the agreement of the contract.  In this case, the profit from the sale would go directly to the lien holder or mortgage holder.

To give an example of acceleration of foreclosure, imagine a lien is given on a $5,000 property.  Monthly payment have been required but the debtor fails to make one or more of these payments.  The mortgage holder can demand payment of the entire $5,000.  Alternatively, they can accelerate the loan in order to regain full payment up to date.

It is important for you, whether you are a lien holder or the debtor, to understand the particular and specific laws regarding foreclosure for your state of residence or the state in which the loan was administered.  Acquainting yourself with and knowing these laws will aid you in your foreclosure procedures should it be required.  You can also find a bounty of information on your state’s official website.

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