A blog post here last month discussed the growing wave of lawsuits by lenders for the balance of mortgage loans left over from foreclosures (and in some cases short sales), known legally as lawsuits for the recovery of "deficiencies."
As discussed, in most foreclosures the lender bids only a part of his loan to win the collateral (the house) at the auction. In most jurisdictions, including Virginia, Maryland and the District of Columbia, the balance will still be owing and the lender has a right to sue the signer of the mortgage for that balance, and many are beginning to do just that.
So you had a foreclosure on your house a few years ago. How do you know if there is still a balance owing and whether you may be facing a lawsuit? The bad news is, unless the value of the house was more than the loan, you are probably owing something, since lenders will only bid a part of the loan, especially if the house is devalued, and that is the case for houses bought during the peak of the market, around 2007, before the crash.
One way to check is to look at your credit report. See if the lender (or its successor) is on the report and whether it is reporting a balance. (Note that this is not foolproof. We have seen instances where no debt was reported, but there was a balance owing.) You can get a free credit report once a year at www.AnnualCreditReport.com.
You can also get clues from the way the lender reported the foreclosure to IRS in the year following the foreclosure. If you got a Form 1099-A, box #4 labeled "fair market value of the property" is generally the amount the lender bid to win the auction. If that amount is less than the amount in box #2 "balance of principal outstanding," you probably have a deficiency.
If you got a Form 1099-C, and here is possible good news, the lender cancelled the debt, for tax reporting purposes. And some courts have held that reporting by the lender to IRS as proof the lender forgave the debt.
If you're facing this problem, or worry that you may be facing it, call us and we'll discuss your options.