As devastating as it may be to lose your Bradley Beach real estate in a short sale or foreclosure, there may be more bad news to come. Even after your home has been sold, many states allow the lender to obtain a mortgage deficiency judgment which permits further pursuit of the unpaid mortgage amount by the lender. A mortgage deficiency occurs when the price the lender gets from the sale is lower than the amount of the money owed–which is always the case in a short sale and is usually so in a foreclosure.
Whether the lender is permitted to sue for payment depends on where you live. Thirteen states are considered non-recourse states and prohibit such a practice. New Jersey, however, is referred to as recourse states where this ban doesn’t exist. ** It is important to note that even in non-recourse states, holders of a second mortgage and issuers of equity lines are free to demand compensation from you for those unpaid monies.
If you have a recourse mortgage and are considering a short sale, it is imperative that, prior to the selling of your Bradley Beach real estate, you require that the bank waive its right (in writing!) to pursue any deficiency judgment. More often than not the lender will agree to do so because you have already proven hardship. Unfortunately, banks are usually unwilling to negotiate deficiency judgments after a foreclosure, but in some cases there is enough equity in your Bradley Beach real estate to satisfy the lender. It is even possible that the bank will forgive the deficiency and claim the unpaid debt as a business loss. Be sure to check with your realtor and/or lender in advance to avoid being blindsided after the sale.
You should also be aware of the tax ramifications of a short sale and a foreclosure. If the lender decides not to pursue a deficiency judgment or even if you live in a non-recourse state, the amount of the unpaid debt is considered income by the I.R.S., and you will be taxed on it. The lender will send you a 1099-C, and you must report this gain on your taxes. Unfortunately, you may not deduct any loss you may have taken.
There is hope, however! The Mortgage Forgiveness Debt Relief Act, passed in 2007 and recently extended to 2012, allows you to exclude from your taxable income most if not all of the forgiven or cancelled debt on your primary residence. Joint filers can exclude up to 2 million dollars; single filers up to 1 million. To claim this exclusion you must attach a completed IRS Form 982 to your tax return.
As always, it is important to consult with your Realtor, lender, accountant, and/or tax attorney to correctly ascertain your status before, during, and after a short sale or foreclosure.