If you lost property to a foreclosure, but the bank sold the home for less than you owed, you may be concerned about the bank suing you for the difference. This is possible in some cases, depending on the kind of property and the law in your state. Some states limit the ability of lenders to go after individuals for debts not satisfied by a foreclosure, while other states have more creditor-friendly laws.
Recourse Vs. Non-Recourse Mortgage Debt
There are two varieties of mortgage debt: recourse and non-recourse. With recourse debt, the lender has the right, through the courts, to pursue your other assets to satisfy debts not cleared by the foreclosure. Banks can have a lien placed on other property of yours or, in some cases, even seize the property outright after courts transfer title to them. With non-recourse debt, the loan is secured only by the property pledged as collateral. If the foreclosure and subsequent sale of the property don't raise enough cash to pay off the loan, the bank -- not the borrower -- must take the loss.
Non-Recourse States
The following are generally debtor-friendly non-recourse states and entities that limit the bank's ability to pursue you after foreclosing on your property: West Virginia, Washington, Virginia, Texas, Tennessee, Oregon, New Hampshire, Montana, Missouri, Mississippi, Idaho, Hawaii, Georgia, Colorado, California, Arkansas, Arizona, Alaska and the District of Columbia.
Non-Judicial Foreclosure States
The following states allow a streamlined foreclosure proceeding that does not involve the courts called "non-judicial foreclosure": Wyoming, Utah, South Dakota, Rhode Island, Nevada, North Carolina, Minnesota and Michigan. These states tend to have laws that are less debtor-friendly and allow creditors more leeway in filing lawsuits to recover debts not covered by the sale of foreclosed property. Some recourse states may grant non-recourse status to first homes or primary residences or both but not to investment properties or second homes or homes that are otherwise not your primary residence.
Considerations
If a lender forgives all or a portion of your outstanding mortgage debt, you may be liable for income tax on the amount forgiven. In practice, however, this is unusual after foreclosures, because the IRS does not assess this tax debt on people who are "insolvent," or have a negative net worth even after the foreclosure. The IRS also does not pursue debtors for income tax on forgiven debt after foreclosures if the debt was non-recourse.
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