House Foreclosures and Bankruptcy

If your house has already been foreclosed on, is there any reason to still file for bankruptcy? 

The answer is unequivocally Yes. You may still want to consider filing for bankruptcy after foreclosure because you may have a deficiency balance.  What’s that?  A deficiency balance is the difference between what you still owe the creditor and what they sold it for at the auction. 

For example, say you bought a house for which you borrowed $100,000.  At the time of foreclosure you still owed $80,000 on it - but it only sold for $50,000 when they auctioned it off.  The mortgage company just lost $30,000 and you just received a financial windfall on that debt. 

This is a deficiency balance.   It’s money that the lender couldn’t recoup even after the sale of your home. 

You aren’t responsible for paying this deficiency balance; the mortgage company will forgive the debt and write it off.  Unfortunately, it is a financial windfall in they eyes of the IRS - and you will still have to pay taxes on it as if it were income. 

The money the bank forgave you is listed on a 1099 tax form, just as if they wrote you a check for it.  Now you owe taxes on income from a house you couldn’t even afford and no longer have. 

In this case, if you file for bankruptcy before the creditor files the 1099, then you are able to discharge that deficiency balance.  Filing for bankruptcy will help you avoid what could be a serious tax liability.