What Happens in Foreclosure
Before a homeowner goes into foreclosure, many banks will be as lenient as possible. Let’s face it, banks don’t really want to foreclose and take properties back. They’re in the business of making money on interest payments, not managing properties.
There comes a point, though, when banks realize that a homeowner isn’t going to catch up, and then they begin foreclosure. When this happens, they become a lot less flexible because they’ve already “written the loan off” and given it to their attorneys to handle.
These foreclosure attorneys handle hundreds of foreclosures and they don’t have the time or patience to give extra understanding to any one homeowner. They have a set of processses that their staff follows to the letter—it’s like a “foreclosure machine”.
Once foreclosure starts, a homeowner has much fewer options, and very little time to do something. The usual process is:
- Notify the borrower of the intent to foreclose – usually done at least 30 days before the sale due to common FNMA mortgage provisions.
- Notify any other parties who may have an interest in the property (e.g., other mortgage and lien holders) of the sale.
- Publish an ad for the sale in a newspaper with circulation in the property’s town, once a week for at least three weeks.
- Hold the foreclosure sale at the property address, selling the property to the highest bidder or giving it back to the lender.
(For more detail on Rhode Island foreclosures see R.I.G.L. Chapter 34-27)
Call us at or contact us and we’ll be happy to give you more information about the foreclosure process. As to what happens if your property is sold at the foreclosure sale, read on.
If the property is sold at foreclosure you will likely be evicted by whoever buys it, which could split up your family as you try to find someplace else to live. Of course, most landlords will do credit checks and when the foreclosure shows up you’re not going to look good—why should the landlord think you’re going to pay him if you didn’t pay the bank? This ugly mark on your credit will likely last for many years, even up to a decade.
If the property sells for less than the mortgage balance, the bank can get what’s called a deficiency judgment against you, which is usually good for 20 years and can be renewed. This would allow them or their collection agency to garnish your wages until you pay what you owe—plus interest! They can also take money from any tax refunds, bank accounts, or lottery winnings, and they can even put liens on any property you own in the future.
If you think you can get out of paying the judgment by filing bankruptcy, think again. Due to new bankruptcy laws changes which happened in October 2005, many people who used to be able to file for bankruptcy can no longer do so.
Even if you can file for bankruptcy, that would only make your credit go from “bad” to “worse”. You might avoid paying part of the judgment, but you’ll really be paying for it for years to come in higher borrowing costs (if anyone will extend you credit) and embarrassment as you constantly explain the bankruptcy on credit, job, rental, etc. applications.
And if this isn’t bad enough already, if the property sells for less than the loan balance at the foreclosure sale, in addition to the possible deficiency judgment, the IRS may come after you for what is called debt forgiveness.
This means that the difference between the foreclosure sale price and the mortgage balance is actually considered income to you, and you may have to pay taxes on it. That’s right: You may have to pay taxes on money you never received. And at a time when you have no money, credit, or even possibly anywhere to live!
Have you heard horror stories about the IRS going after people to get what’s owed? If you don’t pay the taxes on any debt forgiveness you could become the next IRS horror story as they make an “example” out of you by chasing you for years, seizing your property to pay the back taxes, penalties, and interest, etc. And don’t think declaring bankruptcy (if you’re even able to do that) will stop the IRS!
As we state on our legal disclaimer page, we are neither attorneys nor accountants (and we’re not giving you legal or tax advice), so we could be wrong about all of this. But in our experience any or all of the above could happen to someone who is in foreclosure and does nothing.
Why not call us today at 401-300-0093 or contact us and let us talk to you about your options? It’s totally free, with no cost, risk, or obligation to you. You have nothing to lose and everything to gain by talking to us for free about what your options are. Time is running out—take action now before it’s too late!