Foreclosure is when the lender takes possession of a property because the mortgagor doesn’t make their mortgage payments. Some foreclosures occur when the homeowner abandons the home, but most happen when they give the home over to the bank. Foreclosure and bankruptcy often coincide with each other.
Waiting to file bankruptcy until after foreclosure can be beneficial in certain circumstances. However, you’ll need to weigh the benefits against any negative tax ramifications. In today’s blog, the bankruptcy and foreclosure lawyers at Groce and DeArmon explain some situations where you might want the foreclosure sale to go through before you file for bankruptcy.
Getting Rid of a Deficiency Judgment
If you are faced with a deficiency judgment, which is the difference between the mortgage amount and the property auction price, you can erase it in Chapter 7 or Chapter 13 bankruptcy. Also, you can pay other bills at the same time and start fresh.
Regardless of when you file, bankruptcy eliminates your personal liability for a mortgage deficiency. But you still might be able to avoid liability, even without bankruptcy. In certain situations, borrowers who are foreclosed on do not owe a deficiency:
- State laws
- Waiver of deficiency
- No collection attempts
So, if you’re only filing for bankruptcy to avoid a mortgage deficiency balance, it’s best to wait until your foreclosure sale, as you may not be liable for a deficiency anyway.
Related Post: The Do’s and Don’ts of Foreclosure
Get Rid of Homeowners’ Association (HOA) Dues
Another advantage of waiting to file is that you’ll be able to wipe out any homeowners’ association dues assessed against you before the foreclosure occurs. Filing your bankruptcy after the foreclosure sale means that you avoid having to pay dues assessed on the property because this property is no longer in your name. Any dues that are owed would be those assessed before your filing, and they would be eliminated in your discharge.
Potential Tax Problems
There is a downside for waiting to file that you should know. People who file bankruptcy after foreclosure can’t receive the tax benefits that come with a bankruptcy discharge. If you owe capital gains or tax on debt income, you’ll have to qualify for another IRS exception to avoid paying the tax.
Related Post: What You Should Know About Bankruptcy and Foreclosure
Groce and DeArmon: Your Bankruptcy and Foreclosure Lawyers
Whether you are facing bankruptcy, foreclosure, or both, it’s wise to consult an experienced lawyer. At Groce and DeArmon, P.C., we want to help you get on the road to recovery and make the bankruptcy and foreclosure process easier on your finances. Call us today at (417) 862-3706 to schedule your free consultation.