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Losing a home to foreclosure can feel like the end of a difficult financial chapter. However, many homeowners are surprised to learn that the foreclosure process does not always eliminate the debt entirely. In this article, we’ll explore…
When someone loses a home to foreclosure, the lender typically sells the property at auction.
That could be the house in a foreclosure or the vehicle in a repossession. Once the property is sold, the lender applies the sale proceeds toward the balance that was owed on the loan. In many cases, however, the property sells for less than what was owed. When that happens, the remaining amount is called a deficiency balance.
So if the property sells for less than the loan balance, the borrower may still owe the difference after the sale.
A lot of people assume that once their home is foreclosed on, the lender is finished with them. In reality, that’s often not the case, especially with vehicle repossessions and sometimes with foreclosures. That remaining deficiency balance can lead to one of two outcomes:
If the lender writes off the balance, the borrower may receive a 1099 form, which treats the forgiven debt as income for tax purposes. On the other hand, if the lender chooses to pursue collection, they may try to recover the remaining balance through legal means.
After a foreclosure, if there is a deficiency balance, it is generally reflected in the final documentation associated with the foreclosure judgment. In other words, there typically isn’t a completely separate court process required to recognize that remaining balance.
Once the lender identifies that balance, the question becomes how they plan to collect it. In some cases, they may attempt to pursue collection through methods such as wage garnishment or other legal collection efforts.
Other times, the lender may simply decide to write the debt off. While that might sound like good news, it can create a tax issue if the forgiven debt is reported as income.
If you are considering bankruptcy specifically to address a deficiency balance, timing matters. Filing bankruptcy before the lender writes off the debt can be important because once the debt is written off and reported to the IRS, bankruptcy generally will not eliminate the resulting tax obligation.
Yes. In most cases, Chapter 7 bankruptcy can discharge a deficiency judgment. If you have a deficiency judgment after foreclosure, it typically means you are already out of the property. In that situation, the remaining balance is generally treated like other unsecured debt, which can be discharged in Chapter 7.
Alec Solomita, attorney at Solomita Law, PLLC, helps Florida residents understand their rights after foreclosure, including how deficiency balances and collection actions may affect them financially.
Having represented numerous clients dealing with foreclosure-related debt, he understands how lenders pursue deficiency judgments and how bankruptcy may be used to eliminate or manage those obligations.
Alec Solomita focuses on providing clear, practical guidance so clients can make informed decisions about their financial future after losing a home or facing overwhelming debt.
Deficiency balances are generally treated similarly in Chapter 13 and Chapter 7, with one main difference. In Chapter 13 bankruptcy, the creditor holding the deficiency balance may receive a portion of repayment through the Chapter 13 repayment plan. The amount they receive depends on the structure of the plan and the debtor’s financial situation.
Other than the possibility of partial repayment through the bankruptcy estate, the treatment of the debt is largely the same.
If you are dealing with a deficiency balance after foreclosure, the most useful documents to gather are the final foreclosure or lawsuit documents related to the case.
Another important document to watch for is a 1099 form, which may be issued if the lender writes off the debt. If you receive a 1099 related to the foreclosure, you should show it to your bankruptcy attorney so the attorney can explain how it may affect your situation.
Aside from those documents, the foreclosure and any deficiency balance will often appear on a credit report, which can also help confirm the status of the debt.
If the goal of filing bankruptcy is to eliminate a deficiency balance, it’s usually best to file as soon as possible before the lender writes off the debt. Once the debt is written off and reported to the IRS, you may receive a 1099. At that point, the issue is no longer simply the debt itself. It becomes a potential tax obligation.
Because forgiven debt may be treated as taxable income, it can increase your reported income for the year and potentially raise your tax liability. Bankruptcy typically cannot eliminate that tax consequence once it has already been reported.
For more information on deficiency judgments and bankruptcy in Florida, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (407) 255-7458 today.
Alec Solomita, attorney at Solomita Law, PLLC, helps Florida residents understand their rights after foreclosure, including how deficiency balances and collection actions may affect them financially.
Having represented numerous clients dealing with foreclosure-related debt, he understands how lenders pursue deficiency judgments and how bankruptcy may be used to eliminate or manage those obligations.
Alec Solomita focuses on providing clear, practical guidance so clients can make informed decisions about their financial future after losing a home or facing overwhelming debt.
