Losing your home isn't the only negative consequence of foreclosure. If the bank that holds your mortgage loan cannot recover the outstanding balance you owe on your home loan by selling the property, it can choose to either forgive or pursue the unpaid deficiency. Should it pursue you for your post-foreclosure debt, you could lose certain assets -- including your tax refund.
Deficiency Collection
Collection procedures for mortgage deficiencies are the same as collection methods for other types of delinquent debt. If a mortgage deficiency occurs, your lender will notify you of the deficiency, and, should it pursue the debt, you will begin receiving telephone calls and letters requesting payment. If you make arrangements with your lender to pay the deficiency in full or over time via a payment plan, your lender has no incentive to seize payment from you without your permission
Garnishment
If your financial troubles make it impossible for you to pay your mortgage and keep your home, it's unlikely you will have enough disposable income to pay off a large mortgage deficiency. If you fail to make payments, however, your former lender can sue you. Once the lender obtains a civil judgment through the court, it can use its judgment to garnish your income.
While a tax refund constitutes a form of income, only the federal government has the right to withhold all or a portion of your tax refund for unpaid debt. Thus, even if you are subject to a wage garnishment order from your former lender, your tax return will arrive untouched.
Bank Levy
Your lender cannot garnish your tax return before you receive it, but it can seize the money though a bank levy. A creditor with a judgment against you that also knows where you bank can request that the court issue a writ of execution allowing it to seize money in your bank accounts without your permission and apply it to the outstanding deficiency.
Some forms of income, such as child support, unemployment and Social Security payments, are exempt from seizure through a bank levy. Although your former mortgage lender cannot garnish your tax refund before you receive it, it can legally seize your full refund from your bank account via a bank levy.
Protecting Your Refund
Given the opportunity, your former mortgage lender will seize your tax refund. You can protect your tax refund by requesting that the IRS send the refund check to your home rather than requesting that the government direct deposit your refund into your bank account. If you never deposit your tax refund, your creditor cannot seize it. Even if the lender has yet to freeze your bank account, that does not mean that it will not do so in the near future.
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