When you have your home foreclosed on, it can be a devastating experience emotionally and financially. As if losing your home was not enough, you may find out later that you still owe money on the loan. This is known as a deficiency judgment, and it can cost you money in the long run.
When a mortgage lender forecloses on your home, it will take the house and try to sell it through an auction or some other means. The house may be sold for less than what you owed on the mortgage. If there is not much demand for the house, someone could only be willing to pay a small amount for it. When this happens, the difference between what the house sold for and what you owe could be charged to you in a deficiency judgment.
Paying the Bill
When you have been through a foreclosure, you most likely do not have any extra money laying around. Otherwise, you would have been able to avoid the foreclosure in the first place. This makes paying your deficiency judgment very difficult in most cases. The mortgage lender will take the issue to court and get a judgment against you that you have to pay. The court may help you set up a repayment plan that allows you to make payments over time.
If the mortgage lender does not come after you for the balance after the foreclosure, they will forgive the debt. This allows the lender to write off the debt on its taxes. When this happens, the money that is forgiven is counted as taxable income for you. You will receive a 1099 form that reports how much was forgiven. This could negatively affect your tax situation and cause you to have to pay more in taxes for the year.
Deficiency or Tax Liability
When you go through a foreclosure, the lender can choose to go after a deficiency judgment or issue a 1099 for forgiven debt. The lender has to choose one or the other and cannot pursue both options. This means that if you receive a 1099 in the mail from the lender, they are not coming after you for a judgment. As a borrower, you will not have to pay both the lender and the IRS in taxes.