If your home goes into foreclosure it will have a negative impact on your credit score. However, the nature and extent of the negative impact may be different than what you believe it to be. When a financial institution brings a foreclosure lawsuit related to a mortgage default, the institution will normally report to the credit agency there is a foreclosure or a home has been foreclosed upon. This information on your credit score will not necessarily impact on the outstanding balance it shows you owe on the mortgage. The credit report will most likely continue to show the entire outstanding balance of your mortgage being due and owing on your credit report. This negative credit material can stay on your credit report for seven years.
Sales Of Homes In Foreclosure
At the end of the foreclosure process, if the bank is a successful, your home will be sold. In the event the sale of your home at the foreclosure sale does not pay off the entire outstanding debt due in owing on your mortgage, the remaining balance may be shown on your credit score as a “deficiency “. The financial institution may be able to bring a proceeding to collect on this deficiency amount. If they do not take action to collect this deficiency they can report it to the Internal Revenue Service as a forgiven debt. This will cause you to receive a 1099 showing the deficiency as income to you in that tax year. This will cause you to pay income taxes on this deficiency debt!
Foreclosures On Second Mortgages
When the financial institution forecloses on a first mortgage, the second mortgage may continue to be maintained on your credit report by the credit reporting agency. The second mortgage will not show it was foreclosed on because it is a separate and distinct financial obligation.
Bankruptcy And Foreclosure
It may be necessary to file a Chapter 7 bankruptcy to eliminate deficiency judgments related to first mortgages and the personal obligations on a second mortgage. To better understand the inferences and long-term impact on your credit score it is strongly suggested to contact either a bankruptcy lawyer or foreclosure lawyer.