Deficiency judgments becoming reality
I know, I know, tomorrow night is New Year’s Eve and I should only be thinking about positive stuff for the new year, funny party hats and pink champagne. But for an awful lot of Florida homeowners who may be facing foreclosure 2010 will not be any better than 2009 and may in fact be much worse.
If you’re a property owner, either investor or primary residence, who is facing foreclosure or has just been foreclosed on, the tragedy may not be over. Florida mortgage law allows for a lender to file a deficiency judgment against a borrower for the difference between the outstanding balance of the mortgage note plus costs and attorney’s fees and the value of the property foreclosed.
For example, the outstanding mortgage note on your property is $300,000 plus an additional $25,000 in miscellaneous costs and fees totaling $325,000. Now let’s assume that the current market value of the property is $200,000, the amount the mortgage lender can expect to recoup. The difference of $125,000 can become a deficiency judgment against your other assets.
Because of all of the upside down mortgages being foreclosed on in Florida, deficiency judgments are starting to be a realty rather than just an obscure financial recourse that was previously used on a limited bases. In Florida, the mortgage lender has to file a motion for a deficiency after the foreclosure sale is complete and the property’s market value is determined.
A court hearing will determine if the deficiency judgment is granted at which point a borrower is personally responsible for the amount. The only thing that can stop a deficiency judgment is a bankruptcy, which may or not be available to all homeowners.
There are attorneys who specialize in deficiency judgments that foreclosed homeowners can work with to protect their other assets. The outcome of these negotiations depends entirely on the individual’s personal positions, including assets that may or may not be exempt from the process and the flexibility of the lenders.
On a brighter note, if your mortgage debt is forgiven by the lender, you may not owe money to the federal government. Traditionally, if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount could be taxable as income.
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt relief through mortgage restructuring as well as mortgage debt forgiven in connection with a foreclosure also qualifies for the relief.
Note that the Mortgage Debt Relief Act is for principal residences not investment properties. Investment properties that are being foreclosed on have no protection under the Mortgage Debt Relief Act and can result in a real tax problem for homeowners.
The provision applies to debt forgiven in calendar years 2007 through 2012, and caps out at $2 million of forgiven debt, $1 million if married and filing separately. The forgiven funds, however, must still be reported on income tax returns.
The above legal and income tax information is painted with a very broad brush. The purpose of this column is to make homeowners aware of what their potential liabilities may be when facing a foreclosure. Professional help should always be consulted before taking any action.
Getting back to New Year’s Eve – think good thoughts, wear the comical hats and drink the champagne and after this year, anything else you want. Keep repeating, next year will be better, next year will be better, next year will be better. Happy New Year and best wishes for a wonderful 2010.