The Negative Consequences of Foreclosure

In this tough economic crisis many are experiencing in the summer of 2010, bad things are happening to good people. The ‘real’ unemployment rate has been around 20% for over a year, and is not projected to fully correct itself to pre-recession numbers until 2014. Expenses, such as taxes, health insurance, gas, and medical bills, are escalating to never seen before heights. With fewer jobs and increased expenses comes the inability to pay bills, and the largest and most common bill to be skipped becomes the mortgage payment. More people are losing their homes to foreclosure in Phoenix, AZ, than any other time in history. For example, in April 2010 alone, 14,087 properties, out of a total of 34,461 that were ‘for sale’ were bank owned. Thus, 40.9% of all the homes on the market came from distressed homeowners who had to give their homes back to the banks. Another unfortunate side effect of foreclosures is the dropping of home values. In addition to having less income and more expenses, many distressed homeowners are finding that they are unable to sell their property due to the fact that their mortgage note is higher than the value of their house! Given these terrible circumstances, it’s really no surprise that more families than ever are turning to foreclosure as a way out of their financial hardships. But is foreclosure really the best solution? Given the negative consequences of foreclosure and the other alternatives available that most distressed property sellers don’t know about, foreclosure is definitely not the best option. Losing your home to foreclosure has many severe consequences. First, anytime the bank forgives debt greater than $600, they have to report it to the IRS. For example, if the homeowner owed $200k for the house but it sold at auction for $120k, the $80k difference would be forgiven. Since this $80k is forgiven, the former homeowner is not going to pay the expenses for it. Since they don’t pay the expenses, the IRS considers this ‘forgiveness’ to be income, and the former homeowner may have to pay income taxes for that $80k. Not only has this person lost their house, but now the IRS will be going after them for tax payments.rnSecond, the bank may still choose to sue you for deficiencies of the loan. Using the example above, the bank may want the former homeowner to pay the difference between what the home was sold for and the amount owed. Not only has this person lost their house, but now the homeowner may have to make payments to the bank for the remaining $80k of a house they are not even living in! Finally, the credit damage on a foreclosure is quite painful. A foreclosure is considered by many lenders to be the worst possible event to happen to an individuals’ credit score (even worse than a bankruptcy). A credit score can drop up to 200 points with a foreclosure. But to make matters worse, it takes 10 years to remove a foreclosure from your credit score. Also, a low credit score can affect other items, such as your credit card rates as well as your car insurance rates. In many circumstances, having a foreclosure on your record can prevent you from getting certain types of jobs. Not only has this person lost their house, but their credit will be damaged for a decade and are eligible for fewer jobs because of this personal catastrophe. If you are in a similar situation where you are unable to pay bills due to loss of income or increase in unexpected bills and you want to sell your house but are unable because you owe more than it’s worth, you have better options than foreclosure! Utilize a real estate professional who focuses on helping distressed homeowners. • A qualified real estate professional will able to do the following: • Negotiate with the banks on your behalfrn• Purchase the property in AS-IS conditionrn• Work with dozens of cash buyers who are able to buy your house quicklyrn• Provide proof that they are members of the Better Business Bureau Most importantly, a legitimate real estate professional will not charge you for their services. rnA successful real estate professional will negotiate the satisfaction of the loan with a bank. The satisfaction of the loan means that the bank will accept this negotiated price and will agree not to sue the homeowner for deficiencies. rnFinally, working with a real estate professional to avoid foreclosures will allow you to rebuild your credit much quicker, and with most conventional and Federal Loan programs, you may be able to purchase a home again within 2 short years. In summary, due to the unprecedented economic turmoil, many distressed homeowners are turning to foreclosure. However, given the negative tax consequences, the potential for bank lawsuits and the damage to ones credit, foreclosure is not the best alternative. Working with a real estate professional who negotiates with the bank for the satisfaction of the loan will allow the homeowner to move on with his or her life much quicker, without the negative side effects that a foreclosure has.