If a lender holds a lien against property you own, it has the right to repossesses the property if you fail to make payments. For example, when you apply for an auto loan, your lender holds a lien against the automobile until you pay off the loan. If you miss a payment, the lender can seize the vehicle. The same is true with a mortgage or some other financed purchases. The consequences of nonpayment stretch beyond the repossession itself.
Property Sale
After repossessing your property, the lender sells it. Although the lender may sell the property through a private sale, it typically does so via a public auction. You have the opportunity to redeem your property by paying off the outstanding amount you owe plus any fees the lender incurred during the repossession. Your redemption rights vary depending on your state of residence and the type of property repossessed.
Credit Damage
If your lender reports your loan to the credit bureaus, your credit rating suffers from a property repossession. A mortgage repossession, known commonly as a foreclosure, will appear on your credit report for seven years, as will an auto repossession. The payments you missed prior to the lender seizing its collateral will also appear on your credit report for seven years and lower your credit score. A lower credit rating makes it more difficult to obtain a new loan to replace the repossessed asset.
Deficiencies
If the lender sells the repossessed property for an amount equal to or greater than the amount you owe, credit damage and the loss of the asset are the extent of the damage you will suffer when the lender seizes the item. If, however, the property sale does not generate enough revenue to cover your delinquent balance, you are still legally responsible for paying the difference, which is called the deficiency.
Collection Activity
The lender may demand that you pay the deficiency voluntarily or file a lawsuit. You have the right to defend yourself in court, but, should you lose, the court awards a judgment to the lender -- giving it the right to garnish your bank accounts and wages. Judgments also appear on your credit report and adversely affect your credit scores.
Tax Consequences
A lender does not have to pursue you for a deficiency you owe. It can opt to forgive your deficiency. Should the lender forgive your debt, it reserves the right to claim the deficiency as a tax deduction and send you a Form 1099 noting the forgiven balance. You are responsible for including any such forgiven debt as income for tax purposes. Thus, if the lender forgives your deficiency rather than pursuing you for payment following a repossession, you must pay taxes on your debt.
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