The Ins And Outs of Foreclosure (Part 2)

Procedural Flow of Foreclosure

The taxpayer has several options when faced with a foreclosure or repossession. The options have varying costs, time limits and consequences associated with them. Be aware that every state has differing rules and procedures for these actions and failure to abide by the rules in that jurisdiction can results in the loss of time, money and rights for both the lender and the debtor.

The taxpayer may voluntarily surrender a piece of collateral property to the creditor when the threat of foreclosure or repossession is imminent. This will usually cost the taxpayer less in the long run as the creditor will not have to go through all the legal proceedings to do a formal foreclosure or repossession.

For Example: John purchased a new car in January. By November, John could no longer make the payments on the car. Instead of letting things drag on, John took the keys and the car back to the lender and turned the car in for resale.

A taxpayer may also abandon the property, that is voluntarily and permanently give up possession and use of the property with the intention of ending ownership but not actually transferring that ownership to another party. This will usually cost the taxpayer more in the long run as the creditor must wait out the time frame specified by the state and than do formal foreclosure or abandonment proceedings.

For Example: John, from above, was embarrassed about not being able to pay his car note. So, instead of turning in the car, he simply takes no action, leaves the car parked on the side of the road, and walks away from it.

The final course of action is for the creditor to actually proceed with foreclosure actions while the taxpayer still has use and possession of the property. This is usually the middle ground between the first two options and, if the taxpayer is trying to restructure the loan, may give the taxpayer time to get this done before the repossession is completed. If successful, the creditor will add the costs to the loan and the debtor must start making payments on the loan again, but the debtor gets to keep their collateral. If unsuccessful, the debtor has full use of the property until the last minute and it normally costs the same as an abandonment.

For Example: John, again, decides he’s going to get as much use out of the car as he can and continues to take no action, ignores summons, makes no payments, and continues to drive and use the car. One day, John comes out of his home and the car is gone. It has been repossessed.

If the lender is forced to initiate legal foreclosure proceedings, called a judicial foreclosure, a typical flow of events involves the following:

1. A preliminary title search to determine information on all parties that have an interest in the property.

2. A foreclosure complaint is filed with the court by the lender asking for a judgment to foreclose on the property.

3. All parties with an interest in the property are legally served by the court with notice of the proceedings.

4. A hearing is conducted where all parties present their case before the court.

5. The court issues a ruling.

6. If foreclosure is granted then a notice of sale is published.

7. The sale is held, the new buyer is issued a certificate of sale.

8. The sale is reported to the courts and all parties.

9. The proceeds of the sale are disseminated to the various parties (lender, courts, etc) as indicated by state law.

At the conclusion of the sale the court will either determine who excess funds, if any, will be distributed to (very unlikely due to fees) or issue a notice of deficiency to the original debtor, if there is still a balance on the original mortgage and the debt was recourse. This allows the lender to continue to attempt to collect the remaining amount of the debt from the debtor. If the debt was non-recourse then the value of the foreclosed property is considered to be total payment for the outstanding balance and the lender may not continue collection actions.

Next up, Redemption of Property.

In accordance with Circular 230 Disclosure

Anything and everything taxes. I also write the Louisiana State book to go to our new Income Tax Course learners and the state-wide training for upper level Tax Professionals. I am an Instructor of all levels of tax related classes. I love to teach and write as well as taking the absolute best care of my clients all year round.

26 years in Law Enforcement (13 in the Air Force and 13 at the Bossier City PD), 20 years doing income taxes professionally.
My goals now are to spend many years being my 3 grandchildren’s MeeMaw, taking the absolute best care of my clients, and continually learning new things.
Specialties
Taxes! I specialize in military, states, small business, and rentals.
The postings made on this site are my own and do not necessarily represent HR Block’s positions, strategies or opinions.

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