In situations where you know the lender may come after you for the difference after foreclosure, your options are very limited. If you default on your mortgage with a significant amount owed and your lender decides not to pursue a deficiency judgment, it can come back to bite you at tax time. Unfortunately, the Act expired at the end of 2013, and while an extension is being debated, it’s not set in stone. The Mortgage Forgiveness Debt Relief Act of 2007 was enacted to allow homeowners who lost their homes through short sales or foreclosures to escape a major tax penalty for mortgage debt that was forgiven. Generally, canceled debt is counted as income for tax purposes unless you qualify for an exception. Related Article: What Happens When You Default on a Credit Card? Not every state allows for deficiency judgments, but if yours does, you need to be aware of the possibility that the lender could bring a lawsuit against you well after the fact. They seek what’s known as a “deficiency judgment,” which requires you to pony up the difference between the home’s fair market value and what you still owe on the mortgage. If you walk away from a home and there’s a substantial amount of money remaining on the loan balance, your lender may decide to come after you to collect. Foreclosures can stay on your credit for up to seven years, which can impact your long-term ability to obtain new credit, rent an apartment or get utility services in your name without paying a huge deposit. If your home ends up being foreclosed on, that’s the final nail in the coffin for your score. Payment history accounts for 35 percent of your FICO score and anytime there’s a late or missed payment, it knocks off a few points. You can pretty much guarantee that if you go into default, your credit score is going to take a nosedive.
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