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Your Question: If I foreclose on my home in California that has a first and a 2nd, the 2nd being an equity line of credit, can the banks in question put any sort of lien on an investment property that I wish to keep to try to recover any losses due to the foreclosure? There is no equity in the investment property and the reason for keeping it being that we owe far less on the mortgage.I believe Arizona has a law that if banks foreclose on your home, they have no recourse in going after any of your possible other assets. Thank you. I hope my question isn’t too confusing. I guess I am trying to see if it is worthwhile trying to get my investment property out of foreclosure by going for a Loan reconfiguration dur to the lower mortgage, but not if there is any lien that can be attached due to the home foreclosing.
Response: Depending on the type of foreclosure process used, if Wells Fargo forecloses on its mortgage, Wells Fargo cannot come after your investment property. However, Wells Fargo’s foreclosure does not affect the rights of Citibank to go after you for its own debt including instituting collection action against you. In any event, before any lien is put on your investment property, a lawsuit must be filed and the Plaintiff prevails on the lawsuit and obtain a Judgment.
If a non-judicial foreclosure is used, the foreclosing lender cannot come after you for the deficiency after the foreclosure sale. Also, the foreclosing lender cannot come after you for the deficiency after a judicial foreclosure, if your mortgage is a purchase money mortgage in an owner-occupied home with four or fewer units. Non-judicial foreclosure involves using the Power of Sale contained in the deed of trust or mortgage to accomplish the foreclosure sale, whereas the judicial foreclosure involves the use of Courts to accomplish the foreclosure. See California Civil Procedure Code Sections 580d and 580b.
What most often happens is that the lender would forgive the deficiency after the foreclosure sale (if you meet the requirements above) and issue a 1099-C. This is income that must be reported on your tax return using IRS Form 982. However, in light of the Mortgage Forgiveness Debt Relief Act of 2007 that went into effect on December 2007 the forgiven debt amount will not be treated as taxable event/income if the forgiven debt was for a primary home. If part of the forgiven debt doesn't qualify for exclusion from income under this provision such as forgiven debt on a second home or investment property, it may qualify under the "insolvency" exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. A taxpayer is insolvent when his or her total liabilities exceed his or her total assets.
Kindly note that Mortgage Forgiveness Debt Relief Act of 2007 only applies to debts forgiven in 2007 through 2012.
If the other hand the lender elects not to forgive your loan or the rest of the deficiency if you do not meet the requirements above and consequently not to issue a 1099C to you, then the lender may institute collection action against you to obtain the rest of its money (the deficiency) including reaching any other assets you may have. Regardless of whether the lender is an equity loan lender or the first mortgage lender, the lender would use collection agencies first for a very long time before contemplating a lawsuit. Lenders do not usually like to sue for deficiency because the lawsuit may open them up to counterclaim for illegal charges, servicing abuses, etc.
Mortgage Forgiveness Debt Relief Act
Forms 982 and 1099-C
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