Dangers on the Road to Foreclosure
- November 6, 2012
By Joan d’Arc
Rhode Island, the state in which I live, has the highest home foreclosure rate in New England. The ten states in the U.S. with the highest foreclosure rates in the beginning of 2012 include: Nevada, California, Utah, Indiana, Pennsylvania, South Carolina, Connecticut, Florida, Georgia, and Illinois.
If your home has been foreclosed or you are considering “walking away” from it, perhaps to rent an apartment or move in with family, there are some legal facts of which you should be aware. Perhaps even, you’re in the middle of one of those long, drawn out “short sales” or you’re thinking of joining the new wave of voluntary or “strategic defaulters” who have decided to make a clean break and stop investing in your underwater home.
But how fast can you run from banking schemes like “deficiency judgments” and “recourse” laws? In many states known as “recourse states,” maybe not fast enough.
Homeowner beware: approximately forty states have laws on the books that are blatantly bank-friendly. Whether your house sells at auction or short sale, the bank has recourse to the “deficiency” between the amount you owe the lender and the price at which the home was sold. In a “recourse state” the bank has recourse to file a lawsuit in court to grab your personal assets, such as other properties, land, or bank accounts, and may even garnish wages. These asset grabs and wage garnishments may have not yet begun, but there is reason to believe they will begin as soon as the banks catch up with the foreclosure free-fall. Years later, when you least expect it, the bank may come after your paycheck to recoup their losses on the deficiency judgment.
There are approximately forty states classified as recourse states. Those states at the time of this writing are: Alabama, Arkansas, Colorado, Delaware, DC, Florida, Georgia, Illinois, Iowa, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Ohio, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia, Wisconsin, Wyoming. If you live in one of these states and are having trouble paying your mortgage, you better realize your trouble now and begin acting on it immediately. Chapter 7 Bankruptcy or Chapter 13 Reorganization, depending on the median income in your state, may be your only options.
If you live in one of the approximately eleven non-recourse states, the bank can only take the property, and cannot sue in court for any deficiency claimed to be owed to the bank. Hallelujah! You can hand over the keys to the bank and walk away. The states that can be classified as non-recourse for residential mortgages are: Alaska, Arizona, California, Hawaii, Minnesota, Montana, North Dakota, Oklahoma, Oregon, and Washington (and recently joining the list, Nevada). Thus, one task ahead is to explore how states can go about becoming non-recourse, anti-deficiency states, as in the recent example of Nevada.
Following is the legal precedent which gives banks the “right” to do this. The business of banking in many states is not defined by statute, but by common law. World Law Direct explains: “Several states continue to adhere to the common-law rule that when a foreclosure sale does not yield at least the amount of the mortgage obligation, the mortgagee is entitled to a deficiency judgment measured by the difference between the foreclosure price and the mortgage obligation.” States that have laws under British common law allow lenders to sue borrowers directly, as well as to file multiple actions on the same mortgage default. However, non-recourse states do have “anti-deficiency statutes” that prohibit lenders from seeking deficiency judgments.
Following is an example of what occurred in the state of Rhode Island to make sure this dastardly common law rule remained secure on the law books. In the DEPCO v. Macomber case, which occurred during the infamous Savings and Loan scandal in the early 1990s, the Supreme Court of Rhode Island reiterated that the homeowner must pay a deficiency judgment to the bank based on the amount owed on the mortgage minus the cash price for the home at auction. This law is based on “common law rule” which is our leftover lunch from the British Empire.
If you go with the puppet show known as the “short sale,” be aware that the bank holds the strings and the homeowner is the puppet. The bank must approve the short sale amount AFTER you have found someone to buy the house, and usually they do not approve the amount. Current short sales are taking several years if they sell at all; usually way past the period of time the homeowner can survive financially. This is true across America now in most states. During this time, the bank will expect payments on time, and will likely reject any reasonable short sale offer, and your home may go into foreclosure in the end anyway.
Why don’t banks accept reasonable short sale offers? Because banks are holding all the cards and have lots of options; among them, selling the mortgage to a possibly related entity, or suing the homeowner for deficiency judgment in the state courts.
Last but not least, there is another beast set upon the weary homeowner following foreclosure. Regardless of whether the mortgage is recourse or non-recourse, the deficiency judgment is taxable by the IRS. After your house sells at short sale or auction, you will receive a 1099C (1099 Cancellation of Debt) from the bank on which will be reported your “income” from the sale of the house, plus expenses, fees, late fees and other expenses on the bank’s books. This income will be reported to the IRS. The IRS considers the bank’s write-off on its books as income on your books. Nothing else quite makes as clear the notion that money is not real.
The advantage to the bank of simply writing off this debt and sending a 1099 to you and the IRS is that the bank’s deductible loss reduces their income tax by roughly 35% of the amount of the deficiency stated on the 1099.
For the moment, a Congressional bill put forth in 2007 placed a stop to this phantom tax until 2010, and later extended it to December 31, 2012. It is currently unknown whether this date will be extended. So it is advisable to file bankruptcy before that date, since after bankruptcy nobody can get any of this money from you. Depending on the “median income” in your state, your options are filing Chapter 7 bankruptcy, Chapter 13 reorganization, or the simple fact of insolvency might save you; that is, if you don’t own any property, bank accounts, trusts, etc., there’s nothing to take from you. But the IRS always gets its money somehow, usually by garnishing your wages.
There is no real incentive for banks to spend the billions of dollars they received from the Bush and Obama administrations to help homeowners in trouble. They grossly overpay their CEO’s to think up all manner of accounting tricks to make more money to avoid doing the right thing. Obama’s HAMP program was a joke because the bank eventually refused many people after first accepting them in the program. The result was that the homeowner seeking assistance became more behind in their payments than they were when they began the program, thus forcing them to lose their home, when the actual gist of the program was to keep people in their homes.
Wake up, America! The money goes around but does not stop in your hands. It stops in the hands of the bankers and the CEOs. Remember, you are the 99 percent and the banks are the 000001. percent. Let’s close them down. I ask anyone interested or knowledgeable in these subjects to please join in this fight. Please call your state representatives and call a reputable bankruptcy lawyer in your state to find out whether your state is recourse or non-recourse. And remember that looming date: December 31, 2012.
Foreclosed Dreams.com www.forecloseddreams.com/recourse_states
Financial Samurai.com www.financialsamurai.com/2011/07/06/non-recourse-states-walk-away-from-mortgage/
Heloc Basics www.helocbasics.com/list-of-non-recourse-mortgage-states-and-anti-deficiency-statutes/ The list of non-recourse states here is slightly different from the list in Foreclosed Dreams. You should call your state house or a bankruptcy attorney to find out if your state is a recourse or non-recourse state.
About the Author
Copyright 2012 Joan d’Arc is the Associate Editor of Paranoia Magazine, the publisher of the infrequently transmitted HunterGatheress Journal, and Chief Resident of the Paranoid Women’s Institute in Providence, Rhode Island. She blogs at www.conspiracygeek.blogspot.com