Will I Get Sued for the Loan Balance After Foreclosure?

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Will I Get Sued for the Loan Balance After Foreclosure?

The short answer: not necessarily. Statistically, you are more likely to have the debt forgiven (hence the 1099). In some states the bank has the right to sue you for the $20,000, but the bank might simply forgive the debt. If the bank forgives this debt, the bank will issue you a 1099 for the amount of $20,000–what they do depends on state law and the circumstances of your individual case. This example is over-simplified, actually, the bank may also include in its 1099 some other goodies for you: expenses, fees, late fees, and whatever other fees originally appeared in your loan contract.

But why would a bank ever forgive the debt and get nothing rather than at least try to collect something? The answer is simple: because by 1099ing the borrower, the bank is declaring a deductible loss that reduces their income tax by roughly 35% of the amount of the 1099. You see, the bank is not likely to have a collection rate as successful as the 35% that they are guaranteed to get by charging off the debt. From the bank’s perspective, it’s simple and sound economics.Two points are worthy of mention: One, in anti-deficiency states, like California, the bank is not allowed to seek the “deficiency" (the $20,000 shortfall in the example above) in most types of foreclosure. Thus, in California you are certain to get 1099ed and not sued. But in deficiency states (the majority of states), the bank can sue you for the deficiency. However, even in a deficiency state, there is still a fairly good likelihood that you’ll be 1099ed and not sued.

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If you miss too many mortgage payments, your lender can start foreclosure proceedings to take ownership of the property, but it has to follow your state's laws.

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You may have options to delay or stop foreclosure even after the process starts, such as loan modification or filing bankruptcy, depending on your state's laws.

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