The lender can seek a court judgment against them for the difference between the loan amount and the amount of sale at auction (deficiency). With the judgment, they can attempt to collect money from them; they can garnish their wages or levy on their bank accounts. The lender, however, often will not bother to do this though because the collection rate on deficiency judgments are usually not very good --in fact statistically, the collection rates are dismal. The lender may instead choose, and often does choose, to write the debt off for tax purposes. If they do that, they will send them a 1099 tax form and the loss the lender took (the difference between the loan amount and the amount of sale at auction), will be attributed to them as income and the IRS will expect them to pay income taxes on that amount. HOWEVER, if they can show that they were insolvent at the time of the foreclosure---that their debts, including the house, exceeded their assets, then the IRS will not force them to pay any taxes on the amount that the lender writes off.
If they were not fully insolvent at the time of the foreclosure---as an example they had $10,000 more in assets than in debts (and retirement accounts do not count), then while the lender may 1099 them for $100,000, they would only have to pay taxes on the amount that they were above the insolvent level----they would pay income taxes on just $10,000.00.
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Thank you for your answer. Your honest answer is not disappointing. I do not think that they will consider walking away and having their homes foreclosed. They understand their responsibility as I do. I just don't understand why some counties are allowed to "forgive" the SHIP loan after 5 years from the start of the loan and others do not. If they walk away and foreclose like thousands have done in our county, no one wins.
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