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1099 After Foreclosure | Cancellation of Debt Income

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As we noted in Foreclosure Law, foreclosure is the process by which a bank or lender takes possession of collateral used to secure a loan. Put another way, foreclosure happens to a homeowner when he or she doesn’t pay their mortgage. And in What Is a Deficiency Judgement in a Foreclosure | Debt After Foreclosure we discussed that cancellation of debt is a likely outcome following a foreclosure.

1099 After Foreclosure |

Foreclosure devastates credit–the only greater “derogatory” on a credit report is a bankruptcy. If you follow your FICO scores, you would tend to see a drop in the 120 to 150 point range. The amount of the drop will vary depending on the other items on your credit report. A person with good credit might fare quite well, while a person with average or low credit will likely find himself in the high 400s or low 500s–the “radioactive” zone.

However, a credit score is an estimate of one’s creditworthiness today, and so as derogatories (a major blemish on a credit report is called a derogatory in credit parlance) pass into the past, the effect of derogatories lessens. Your score will tend to rise over time.

So, before a foreclosure happens to you, you should do some pre-foreclosure credit planning–you may likely not have borrowing power in the two year period following your foreclosure. So, if you absolutely must borrow to buy a car in the next year or two, you’ll get a better rate before the foreclosure goes on your credit report. In fact, after a foreclosure, you might not be able to borrow for a car loan at all. Of course, good fiscal health dictates that one should never borrow to buy a car–but that’s another topic.

How To Improve Credit After Foreclosure

Foreclosure is a big hit to a credit report–don’t compound it by creating other derogatories. Keep everything else clean on your credit report. That means paying bills on time, and avoiding requests for new credit. A request for new credit creates an “inquiry” on your report, which lowers your score by a small amount. Make a slew of inquiries, and you might lower your score by 20 points or so.

Credit reporting agencies are allowed by law to report your payment history on a credit report.

Foreclosure devastates credit–the only greater “derogatory” on a credit report is a bankruptcy. If you follow your FICO scores, you would tend to see a drop in the 120 to 150 point range.

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Credit Repair After Foreclosure

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How Does Foreclosure Affect My Credit?

Foreclosure devastates credit–the only greater “derogatory” on a credit report is a bankruptcy. If you follow your FICO scores, you would tend to see a drop in the 120 to 150 point range. The amount of the drop will vary depending on the other items on your credit report. A person with good credit might fare quite well, while a person with average or low credit will likely find himself in the high 400s or low 500s–the “radioactive” zone.

However, a credit score is an estimate of one’s creditworthiness today, and so as derogatories (a major blemish on a credit report is called a derogatory in credit parlance) pass into the past, the effect of derogatories lessens. Your score will tend to rise over time.

So, before a foreclosure happens to you, you should do some pre-foreclosure credit planning–you may likely not have borrowing power in the two year period following your foreclosure. So, if you absolutely must borrow to buy a car in the next year or two, you’ll get a better rate before the foreclosure goes on your credit report. In fact, after a foreclosure, you might not be able to borrow for a car loan at all. Of course, good fiscal health dictates that one should never borrow to buy a car–but that’s another topic.

How To Improve Your Credit After Foreclosure

Foreclosure is a big hit to a credit report–don’t compound it by creating other derogatories. Keep everything else clean on your credit report. That means paying bills on time, and avoiding requests for new credit. A request for new credit creates an “inquiry” on your report, which lowers your score by a small amount. Make a slew of inquiries, and you might lower your score by 20 points or so. A foreclosure will show up in several places on a credit report. First, it might show under the “public information” section as a legal claim or lawsuit. Second, a foreclosure will appear as an entry for one or more accounts (your mortgage loan account is an “account” for credit reporting purposes).

In the account section, a foreclosure will appear as several months of “late pays”, appearing as 60, 90, or 120, which indicates the number of days late you were. Finally, the final event of foreclosure will report on the account as “RF” for “repo, foreclosure” or “CO”, for “charge-off”, meaning the bank charged off the loan without making further attempts to collect. What one commonly sees in an account leading up to foreclosure is the following: 30, 60, 90, 120, 120, 120, RF–and then the account goes dead. That sequence of entries tells a very clear picture of a borrower falling 30 days, then 60 days, then 90 days late, etc., then losing the home to foreclosure.

Your Right to Challenge Entries in Your Credit File

Credit reporting agencies are allowed by law to report your payment history on a credit report. You, however, have the right to challenge, and to have removed, derogatory information that is not accurate. Now, a short sale is not a foreclosure; similarly, a deed in lieu is not a foreclosure. As such, those foreclosure alternatives should not be reported as foreclosures. Similarly, the late pays must be reported accurately.

Now, there are credit repair agencies that can improve or remove derogatory entries, but they don’t really do anything that you can’t do yourself. You pay credit repairers for the convenience, and not because they are the only ones who can do it.

Credit can be repaired. Check out the forums at “Credit Info Center”–you can google that phrase. The forums will give you good guidance on how to improve or remove credit entries. The best inquiry dispute letter we could find anywere is here: Sample Credit Inquiry Dispute Letter, and the best letter to challenge incorrect derogatory information is this Sample Letter For Credit Repair | Credit Repair Sample Letter. When you challenge a derogatory with a credit reporting agency (Transunion, Equifax, or Experian), the agency must investigate or remove the item within 30 to 45 days.

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Can Bankruptcy Stop Foreclosure?

Yes, bankruptcy can stop foreclosure–but not without careful planning, and not without consequences. Read on to learn how to make this important decision.

Bankruptcy Stops All Legal Proceedings

Bankruptcy stops all civil legal proceedings, athought the word “stop” is not truly appropriate. The legal term is “stay”–bankruptcy stays all legal proceedings. A bankruptcy stay subsumes all civil legal proceedings against a debtor (including mortgages, loans, helocs, foreclosures, etc.); those legal proceedings become part of the bankruptcy. To learn more about foreclosure read Foreclosure Law | Stop Foreclosure.

Bankruptcy Means Many Things

Of course, bankruptcy has several Chapters within it available to consumers; there is a Chapter 7 bankruptcy and a Chapter 13 bankruptcy. A Chapter 7 bankruptcy is a liquidation event: you give up all your remaining non-exempt property (everything that isn’t protected by law, such as pensions, IRAs, etc.), and in return, all your obligations are wiped out. Chapter 13 is a different type of bankruptcy. A Chapter 13 bankruptcy is a repayment plan reorganization. You must plegle your disposable net income (after some reasonable expenses) for the period of the plan, usually 3 to 5 years. In return, you keep some or all of your property, and you pay at least something toward your debts. Chapter 13 takes 3 to 5 years to complete, depending on the plan.

Keep in mind that with bankruptcy “reform” under the Bush administration (don’t get me started) bankruptcy now includes “means testing,” where an applicant’s ability to pay is considered in whether Chapter 7 will even be allowed. So, one might be forced into Chapter 13 anyway.

A Bankruptcy Court Cannot Adjust Mortgage Rates (Yet)

Presently (Jan. of 2009), bankruptcy courts do not have the power to adjust mortgage rates or to adjust mortgage principal. However, the incoming Obama administration is working to give bankruptcy courts just that power. Keep an eye on this–if it passes, it will make bankruptcy a very attractive option for homeowners struggling with above-market interest rates on mortgages.

Bankruptcy As Leverage

Can a bankruptcy filing be used as leverage by a homeowner to gain some advantage over a bank? There are really two answers: possibly, and “ask your bankruptcy lawyer.” Each case will differ widely. There are two very strong reasons why a bankruptcy might induce a bank to retreat from a foreclosure posture. First, a bankruptcy will stay any foreclosure action; which means a lender has to sit and wait–all the while receiving no mortgage payments–through the bankruptcy proceeds. Second, there is always the risk that the bank might loose some rights within the bankruptcy proceedings. While a bankrtuptcy judge can’t specifically modify a loan, he or she can investigate claims against the lender such as lender fraud.

Every case will differ widely. Bankruptcy is best handled by a lawyer, so you might inquire with him or her if the option is right for you. Good luck.

Portions of this article were contributed by Medical Malpractice Lawyers.

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What Is a Deficiency Judgement in a Foreclosure | Debt After Foreclosure

Will I Owe a Debt After Foreclosure?

Well, let’s begin with a different question: will I be sued after a foreclosure? Whether you can be sued after a foreclosure depends on whether your state is a deficiency state or an anti-deficiency state (you want anti-deficiency).

What is Anti-Deficiency in a Foreclosure?

An anti-deficiency law is a law that states that a lender in a real estate transaction cannot pursue a judgement against the borrower if the borrower defaults on the underlying real estate loan and the lender fails to recoup the entire amount of the loan. The “deficiency” is the shortfall that a bank gets stuck with if a foreclosure sale does not yield enough to cover the amount of the mortgage loan. Sound too good to be true? Nevertheless that is the law in some states, most notably California. You can read about California Anti-Deficiency Law.

There is actually a fairly sound policy reason for anti-deficiency. Before and during the great depression, lenders were free and easy with mortgages–and property appraisers played right along (sound familiar?). When a borrower foreclosed, the lender got the property, and then got to go after the poor borrower’s last remaining assets. This pushed many families into poverty. Anti-deficiency laws place the burden on lenders, as if to say: “you, lender, are best positioned to properly appraise a property, so don’t lend beyond that value, or you’ll be stuck without recourse.

Will I Be Sued?

In an anti-deficiency state, you will not be sued because the bank does not have the right–you are free to begin your financial life anew.

But, in a deficiency state, the lender does have the right to sue you. However, believe it or not, not all lenders will sue for deficiency. Statistics are not available, but the chances are better than 50% that you will not be sued for deficiency. What else can a lender to do? If they sue on the deficiency, they might win a judgment that will never be paid; a foreclosed borrower is not exactly sitting on top of the world at that moment. Or, they might force the borrower into bankruptcy, and again the lender gets nothing. And, suing evicted and foreclosed families is hardly a great business to be in.

What is most common is that the lender reports the foreclosure on the borrower’s credit report, and forgives the debt. This forgiveness of debt has other consequences, as you can read in the next article in the series,
1099 After Foreclosure | Cancellation of Debt Income.

Portions of this article were contributed by Northwest Indiana Bankruptcy Lawyer Jonathan Petersen.

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Foreclosure Law | Foreclosure Help | Stop Foreclosure

What Is Foreclosure? 

Foreclosure is the process by which a bank or lender takes possession of collateral used to secure a loan. Put another way, foreclosure happens to a homeowner when he or she doesn’t pay their mortgage.

Foreclosure is not always a court action. There are two types of foreclosure: judicial foreclosure and trustee’s sale (non-judicial) foreclosure. Some states use one or the other, and some states (like California), use both. Judicial foreclosure is just like it sounds: it is a lawsuit by a bank against a lender to secure a judgment of foreclosure. This means paperwork, court proceedings, motions, orders, appraisals, and a formal auction. As such, judicial foreclosure is more expensive for a bank, and takes longer.

A trustee’s sale is a walk in the park for a bank: The trustee names in the deed of trust (mortgage) simply needs to record a public notice of default to initiate a non-judicial foreclosure against the owner. No court intervention is required. If the owner doesn’t pay in a certain amount of time, the trustee can schedule a public sale of the property.

Homestead Protection

If you are sued for a debt that is not related to your home, you may enjoy homestead protection–a large amount of the equity in your home may not be reachable by outside creditors–but homestead protection does not protect you from the amount that you owe to lenders who have mortgages against your property. We discuss homestead protection in this article: Homestead Exemption.

Deficiency Judgments

Deficiency Judgments are legal judgments available (in only some states) to banks and lenders if the foreclosed property does not yield enough money at a foreclosure sale to satisfy the entire mortgage loan. That’s a mouthful, so the following explanation should make it clearer. Say you buy a property with $20,000 down, and you borrow $80,000 from First Bank. You fall behind, and First Bank forecloses on the property and the property yields $70,000 at a foreclosure sale. Well, the bank is still out $10,000. That “deficiency” may be the subject of a deficiency judgment if the bank wants to pursue it. That said, banks don’t always have the right to pursue deficiency judgments, and even when they do, they don’t always seek deficiency judgments. We discuss deficiency judgments at length generally, and with respect to California read Deficiency Judgement, Anti-Deficiency Laws, California and Elsewhere.

Why Foreclosed Homeowners Receive 1099s for Cancelled Debt First, the basics: if you owe a debt to someone else, and that debt is forgiven, the IRS Code treats that forgiven debt as income to you. Does it make sense? Sure, because you have just received something that you did not have before. And so, when a homeowner loses a property in foreclosure, banks will typically charge off (forget about) the mortgage loan and simply issue to the former borrower a 1099 for the amount of the loan that the bank forgave. For example, if you bought a house with a $100,000 loan, and the bank received $80,000 in a foreclosure proceeding, that leaves $20,000 to collect from you, the borrower. Now, the bank might sue you for the $20,000, or the bank might simply forgive the debt. If the bank forgives this debt, the bank will issue you a 1099 for the amount of $20,000–what they do depends on state law (more on this below) and the circumstances of your individual case. This example is over-simplified, actually, the bank may also include in the 1099 expenses, fees, late fees, and whatever other fees originally appeared in your loan contract.

More Information on Foreclosure and Anti-Deficiency

For more information, see our full article on 1099s and cancelled debt entitled 1099 After Foreclosure – Cancellation of Debt & Anti-Deficiency.

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Deficiency Judgement, Anti-Deficiency Laws, California and Elsewhere

July, 2007

As we noted in Foreclosure Law, foreclosure is the process by which a bank or lender takes possession of collateral used to secure a loan. Put another way, foreclosure happens to a homeowner when he or she doesn’t pay their mortgage. And, in California Foreclosure Law, we looked more closely at the law and process surrounding foreclosure in California.

Anti-Deficiency Laws Protect Real Estate Debtors

An anti-deficiency law is a law that states that a lender in a real estate transaction cannot pursue a judgment against the borrower if the borrower defaults on the underlying real estate loan and the lender fails to recoup the entire amount of the loan.Section 580b Anti-Deficiency Protection for Purchase Money Mortgages for 1-to-4 Unit Properties Section 580b prohibits a deficiency judgment against a borrower who incurred a loan to purchase a residential property (as opposed to a refinance), and if that property is one-to-four units. Refinance loans do not fall within 580b–so refinancers beware, you might be giving up some anti-deficiency protection if you refinance your original purchase money loan. Nevertheless, refinancing borrowers may still enjoy anti-deficiency protection by virtue of Civil Code 580d.

An example will illustrate: Assume a borrower borrows $500,000 from a lender to purchase a property costing $550,000. Soon after, the borrower falls behind in his payments, and the bank is forced to foreclose, and the home is ultimately sold for $400,000. The $100,000 that the lender lost on the deal is called a “deficiency” or “deficiency judgment.” In California, in some circumstances, the bank can not sue the borrower for the amount of the deficiency–hence the term “anti-deficiency protection.”

California’s anti-deficiency rules are found in Section 580 of the California Civil Code. There are two separate provisions, and the two provisions overlap slightly:

Section 580d Anti-Deficiency Protection for All “Trustee’s Sale” Foreclosures

Section 580d sets forth far broader anti-deficiency protection. Section 580d protects all borrowers from anti-deficiency protection in foreclosures that are “power of sale” or “trustee’s sale” foreclosures–as opposed to a judicial foreclosure. We discussed judicial foreclosures, and we noted that judicial foreclosures are very rare, and is almost never used in residential foreclosures.

And so, with such powerful anti-judgment protection for borrowers, what happens to the loan that the lender made? In short, the lender takes a loss on the loan, and the borrower, while immune from lawsuit, gets a very serious negative mark on his or her credit.

There is another curious after-effect to a California foreclosure where lender is blocked by the anti-deficiency rules: the lender issues a 1099 to the borrower in the amount of the lender’s loss on the loan. The 1099 is issued for “cancellation of debt” income–which is, technically speaking, taxable income under the US tax laws. Credit card companies often issue 1099s for “COD” income when they write off a bad debt. The lender, by issuing a 1099, can write off the lost loan and reduce its taxable income.

A foreclosed borrower faced with a sizeable 1099 can still maneuver and avoid a stiff tax bill: the foreclosed borrower may exclude the amount of the forgiven debt from his or her income. The borrower must file IRS “Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness.” If the borrower is insolvent at the time of the forgiven debt, the IRS may forgive the liability.

If faced with such a 1099–get some professional guidance, it’ll go a long way.

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California Foreclosure Law | Foreclosure in California

As we noted in Foreclosure Law, foreclosure is the process by which a bank or lender takes possession of collateral used to secure a loan. Put another way, foreclosure happens to a homeowner when he or she doesn’t pay their mortgage.In California, there are two types of foreclosure: judicial foreclosure and trustee’s sale (non-judicial) foreclosure. Judicial foreclosure is very rare, and is almost never used in residential foreclosures. Judicial foreclosure is just like it sounds: it is a lawsuit by a bank against a lender to secure a judgment of foreclosure. This means paperwork, court proceedings, motions, orders, appraisals, and a formal auction. As such, judicial foreclosure is more expensive for a bank, and takes longer. There are other important differences to the homeowner that we’ll cover in a moment.
 
A trustee’s sale is a walk in the park for a bank: The trustee names in the deed of trust (mortgage) simply needs to record a public notice of default to initiate a non-judicial foreclosure against the owner. No court intervention is required. If the owner doesn’t pay in a certain amount of time, the trustee can schedule a public sale of the property.

Judicial Foreclosure vs. Trustee’s Sale Foreclosure (Non-Judicial Foreclosure)

But now to the important differences between judicial foreclosure and a trustee’s sale:
1. In a judicial foreclosure, the borrower is entitled to a 1-year “right of redemption” by which the borrower enjoys the right to repurchase the property from a successful bidder. This puts a real damper on the auction sale price, as one might imagine.
2. In a trustees sale, the bank cannot get a deficiency judgment against the borrower (on certain residential property). In short, that means the bank cannot sue the borrower for the difference between the bank loan and what the bank received at the trustee’s sale.

Anti-deficiency is a good deal for homeowners whose properties are “underwater,” (where the value is less than the total amount of the loans).

Foreclosure Defaults and Timelines

The short answer: a foreclosure in California takes about 7 to 9 months from when a borrower first misses a payment. When a borrower misses a payment on a mortgage loan, the bank springs into action. The bank will make telephone calls to the borrower and ask for payment. The representatives making these calls are low-paid hourly workers. They are trying to collect payment, but will also record what the borrower says into a database. At this stage, the lender is trying to establish whether the loan is in trouble or not, and try to get the borrower up to date. As a borrower falls further into default, the bank will continue collection efforts. After three or four months with no payments, the bank will send to the borrower a notice advising that foreclosure will begin in 30 days. Upon the expiration of that 30 days, the bank will file a “Notice of Default.” This notice (familiarly called an “N.O.D.”) is a key event in the foreclosure process: once the N.O.D. is filed, the wheels of foreclosure begin to turn. Keep in mind, though, that the N.O.D. won’t get filed until the borrower is 3 to 5 months behind in payments. Recently (in mid-2007), I have experienced lenders taking much longer to file N.O.D.’s–they do not appear to be in a rush.

After the N.O.D. is filed, the “redemption period” begins. The redemption period is simply a period of dormancy during which the borrower can “cure” the default by bringing his payments up to date. If the borrower does nothing, at the end of the redemption period, the “publication period” begins. The redemption period lasts 90 days from the N.O.D. filing.

The publication period lasts another 30 days beyond the redemption period. At the commencement of the publication period, the Trustee prepares a Notice of Trustee’s sale and published in a newspaper of general circulation in the city where the property sits. Up until 5 days before the trustee’s sale, the borrower enjoys a right to reinstate the loan by bringing all payments current.

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1099 After Foreclosure – Cancellation of Debt & Anti-Deficiency

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Here we take a closer look at the phenomenon of 1099 Cancellation of Debt income following a foreclosure.

Why Foreclosed Homeowners Receive 1099s for Cancelled Debt

First, the basics: if you owe a debt to someone else, and that debt is forgiven, the IRS Code treats that forgiven debt as income to you. Does it make sense? Sure, because you have just received something that you did not have before. And so, when a homeowner loses a property in foreclosure, banks will typically charge off (forget about) the mortgage loan and simply issue to the former borrower a 1099 for the amount of the loan that the bank forgave. For example, if you bought a house with a $100,000 loan, and the bank received $80,000 in a foreclosure proceeding, that leaves $20,000 to collect from you, the borrower; but read on.

Will I Get Sued for the Loan Balance After Foreclosure?

The short answer: not necessarily. Statistically, you are more like to have the debt forgiven (hence the 1099). In some states the bank has the right to sue you for the $20,000, but the bank might simply forgive the debt. If the bank forgives this debt, the bank will issue you a 1099 for the amount of $20,000–what they do depends on state law (more on this below, and in our article on anti-deficiency) and the circumstances of your individual case. This example is over-simplified, actually, the bank may also include in its 1099 some other goodies for you: expenses, fees, late fees, and whatever other fees originally appeared in your loan contract.

But why would a bank ever forgive the debt and get nothing rather than at least try to collect something? The answer is simple: because by 1099ing the borrower, the bank is declaring a deductible loss that reduces their income tax by roughly 35% of the amount of the 1099. You see, the bank is not likely to have a collection rate as successful as the 35% that they are guaranteed to get by charging off the debt. From the bank’s perspective, it’s simple and sound economics.Two points are worthy of mention: One, in anti-deficiency states, like California, the bank is not allowed to seek the “deficiency” (the $20,000 shortfall in the example above) in most types of foreclosure. Thus, in California you are certain to get 1099ed and not sued. But in deficiency states (the majority of states), the bank can sue you for the deficiency. However, even in a deficiency state, there is still a fairly good likelihood that you’ll be 1099ed and not sued.

I Have Been 1099ed, But I Was Just Foreclosed, and My Financial Condition Is Terrible

Breathe easy, insolvent (broke) taxpayers are not liable for “Cancellation of Debt” (COD) income, generally speaking. However, if you need help with this circumstance, you’ll definitely need to find your own tax professional because the rules are technical.

The applicable Code section is 26 U.S.C. Sec. 108, which provides, in part, the following, “Gross income does not include any discharge . . . of indebtedness . . . when the taxpayer is insolvent” Insolvency is defined elsewhere in the code to mean a simple balance sheet calculation: do your liabilities exceed your assets? So insolvent taxpayers are absolved of the responsibility for enormous COD income hits.

The IRS form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), link here: http://www.irs.gov/pub/irs-pdf/f982.pdf covers this issue exactly, and can give relief to an insolvent taxpayer hit with a huge 1099. Explore this with your tax advisor. The Mortgage Forgiveness Debt Relief Act of 2007 With the so-called “mortgage meltdown” of 2007, the issue of relief from COD income began to gain legislative momentum. There is a bill making its way through the house (as of 10/4/07, it ultimately passed) that would eliminate this entire problem. Keep in mind, this bill passed the house by 386 to 27–rarely does congress agree on anything so unanimously. The proposed law is the Mortgage Forgiveness Debt Relief Act of 2007. It would amend the Internal Revenue Code to exclude from gross income amounts attributable to a discharge of indebtedness incurred to acquire a principal residence–up to $2 million. It would also set forth rules for determining the allowable amount of the exclusion for taxpayers with nonqualifying indebtedness (rental properties and other loans) and who are insolvent. As of tax-time, 2008, the law is so new that there isn’t even a form available to claim its use.

If faced with such a 1099–get some professional guidance, it’ll go a long way.

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What Happens After Foreclosure

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Foreclosure is the process by which a bank or lender takes possession of collateral used to secure a loan. Put another way, foreclosure happens to a homeowner when he or she doesn’t pay their mortgage.

Two Types of Foreclosure

There are two types of foreclosure: judicial foreclosure and trustee’s sale (non-judicial) foreclosure. Some states use one or the other, and some states use both (the lender can usually choose which manner of foreclosure in states that allow both). Judicial foreclosure is just like it sounds: it is a lawsuit by a bank against a lender to secure a judgment of foreclosure. This means paperwork, court proceedings, motions, orders, appraisals, and a formal auction. As such, judicial foreclosure is more expensive for a bank, and takes longer. For information on foreclosure specific to California, read California Foreclosure Law.

A trustee’s sale is a speedy procedure for a bank: The trustee names in the deed of trust (mortgage) simply needs to record a public notice of default to initiate a non-judicial foreclosure against the owner. No court intervention is required. If the owner doesn’t pay in a certain amount of time, the trustee can schedule a public sale of the property.

After a foreclosure, a deed is recorded in the county records showing the new owner as a purchaser of the property in the foreclosure action.

Eviction After Foreclosure – How Long Can I Stay in My Home?

Foreclosure terminates the right of a borrower to remain in possession of a property. However, that does not mean that a borrower must leave immediately upon foreclosure. A lender repossessing a property, or a buyer in a foreclosure, must still honor eviction laws following a purchase in foreclosure. What that means is that if and when a bank repossesses a home in which you were the borrower, and you are still living in the home, the bank cannot send the police, thugs, realtors, or anyone else to unilaterally kick you out–the new owner of the home must follow the legal procedures set forth in your state to evict you.
See the next article in the series: What Is a Deficiency Judgement in a Foreclosure | Debt After Foreclosure, and then Credit Repair After Foreclosure.

What that means in terms of time will differ from state to state, but at the very least–even if the new owner works terribly quickly–you might remain in possession for a few weeks; in practical terms a few months is more realistic. But, keep in mind that following a foreclosure, the clock is ticking fairly quickly, and the day of reckoning will come–you will eventually be evicted from your home. Most folks simply leave either before or upon foreclosure, but some unfortunate folks have nowhere to go, so they linger at the home, hoping to use the extra few weeks to get a foothold at a new job and save a few dollars for the next steps, which are never easy.

Keep in mind that when one remains in possession of a foreclosed house, you are essentially a “squatter”–and when you are sued for eviction (and you eventually will be if you don’t either leave or contact the new owner), you will also be sued for the rental value of the home in the post-foreclosure period. An eviction proceeding is a court case, with the filing of a complaint, service of the complaint, court dates, and ultimately a trial. Most jurisdictions have a speedy procedure, but it’ll still takes weeks or months. Letting such a case go all the way is hardly prudent though, but this reality gives you a good bargaining chip to get a reprieve of a few weeks.

A prudent approach might be to contact the new owner (they might actually contact you to find out if you intend to leave voluntarily) and ask for a few weeks before leaving. Most owners would agree to something reasonable rather than go to court to evict you. Keep in mind that an eviction proceeding is a separate legal proceeding from the foreclosure proceeding. It’ll be a different case, before a different judge (most likely), and might even be in a different court. It’ll also hurt your credit independently of the foreclosure, so tread lightly and communicate with the new owner.

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