Regarding the junior liens, I am seeing more and more people being pursued for the balances owed (even when the loan was purchase money). The reason for this is two-fold -
1. Lenders are selling the bad debt to specialized collection companies. They are paying almost nothing for the debt, but are very aggressive in their collection efforts.
2. Private mortgage insurance companies are also pursuing their rights under the law to collect against the balances they insured.
If you are notified about such a collection action, you need to contact an attorney immediately. They will be the only ones who can tell you if you have an affirmative defense to the collection action.
My question to you is WHY ALLOW A FORECLOSURE? If you take charge of the situation and work with an experienced (let me say that again, experienced) short sale listing agent, you can then negotiate the outcome on all the junior liens. Even if they don't agree to accept payment received as payment in full, you will NOT be worse off then you are right now, AND, you then set the timeline for move out, etc. Call, if you would like to discuss your options further. There is no obligation if you choose to allow the foreclosure. However, my philosophy is Foreclosure is NOT a Choice, it is something that happens to you when you are willing to abdicate control. Find out about ALL your options and Dare to Dream.
Shel-lee Davis, CDPE, SFR, QSC
Your Real Estate Consultant for Life
RE/MAX Palos Verdes Realty
Its better to be proactive and take responsibility of the debts and consider all your options before letting your property be foreclosed upon by the 1st lender.
Ofcourse, if the property is investment property other than single residence and or more than 4 units , and if the lender choose to proceed with judicial foreclosure, it could recover deficiency judgment against debtor from the court.
1. Deficiency Judgement: When the lender or lienholder pursues the borrower for the balance still owed after a foreclosure or short sale (rather than forgiving the deficiency).
2. Tax Consequences regarding this deficiency when it is forgiven by the lender. Unless the debt was from a non-recourse loan (see the great answers below from Shel-lee, Tara, Scott, and Mike below) when the lender "forgives" or "cancels" the deficiency debt they have created a possible tax situation, as the IRS and CA Franchise Tax Board treat forrgiven debt as income. The lender issues a 1099-C (for short sales) or 1099-F (for foreclosures) to the borrower. Even after receiving the 1099, many borrowers are able to exempt themselves from paying income tax on it if they qualify under the Mortgage Firgiveness Debt Releif Act of 2007.
However, many other borrowers are NOT able to get an exemption from paying income tax on the 1099 amount under this act...usually because the property did not qualify as their primary residence or they cashed out an amount beyond the orriginal loan used for the original purchase of the property. For these borrowers, INSOLVENCY becomes the backup plan to try to gain the tax exemption. I am not a CPA, but the basic definition of Insolvency is when qualified debts outweight your qualified assets. You should absolutely consult a tax professional to walk you through the tax consequences of your individual circumstance.
I'd be happy to refer a couple of great local CPA's that I know.
MBA, ABR, SFR, e-PRO
Certified Short Sale & Foreclosure Resource
Keller Williams Realty
Sheyenne Schultz http://www.shysells.com 310-429-4170 email@example.com
Short Sale/REO Specialist
Buy a home after foreclosure expert
HOWEVER, if you have:
*a second or third mortgage on the property (not the foreclosing lender, which is usually the holder of the first mortgage),
*which was not used to purchase the home or refinance funds that were used to purchase the home (like a home equity line of credit, for example),
in California, the lender on that loan or loans MAY pursue you after a foreclosure.
Most often, the "junior lender" doesn't file a lawsuit, but rather send the account to a collection agency to try to get you on a payment plan for it - especially if you don't have a big old pile of money sitting around that they could tap into via a lawsuit.
Broker - 01416432
If the property was your primary residence and have a purchase money (Non Recourse) loan you are protected under the Anti Deficiey laws in California when it goes to foreclosure.
If however you pulled money out, refinanced, or rented the property out you may be liable for deficiency.
We are not attorneys but I am pretty sure the above is correct. I advise you to also consult with your CPA about taxable consequences.
The Aubin Team