Guarantor Liability After House is Foreclosed
Can a person who is a guarantor of a mortgage be held liable for the deficiency after after a house is foreclosed? According to a recent decision by the Georgia Court of Appeals, the answer is yes. Guarantor liability from foreclosures just took a harsh turn for guarantors in Georgia.
In COMMUNITY & SOUTHERN BANK v. DCB INVS., LLC, 760 SE 2d 210 – Ga: Court of Appeals 2014, the court concluded that ” CSB’s failure to obtain a valid confirmation of the foreclosure sale, pursuant to OCGA § 44-14-161, does not ‘impair its authority to collect the difference between the amount due on the note and the foreclosure sale proceeds from [Belke and the Coueys] based upon [their] personal [guaranties].”
The Good Old Days Are Gone
Years ago, back when the real estate market was hot, banks usually would just foreclose on a house and flip it fast without much loss.
Today, market conditions are horrendous. As a consequence, many banks have become quite aggressive in pursuing foreclosure deficiencies. Banks have no problem going after a guarantor to recover a loss on a mortgage loan.
Here is how this could play out. Young couple buys a nice new home but needs grandma to sign a personal guarantee so that they can get a lower interest rate. Everything starts out great. However, two years later both young husband and young wife lose their job after the local factory closes and moves to China. House gets foreclosed. Young couple files for Chapter 7 bankruptcy and gets clear of all of their debt. However, bank sues grandma on the deficiency since she is the cosigner. Grandma will have to either pay the deficiency or file Chapter 7 bankruptcy herself.
Another Foreclosure Bomb to Watch Out For
The other issue that people need to watch for after a foreclosure is tax liability. When a mortgage company writes off the loss, the can recover some portion of it by claiming the loss with the Internal Revenue Services. In turn, the borrower gets tagged by the Internal Revenue Service for the forgiveness of the debt.
If the borrower can prove to the IRS that they were insolvent at the time of the foreclosure, there should be no tax liability. If the borrower files bankruptcy before the foreclosure, there will not be any tax liability. Bankruptcy is never a taxable event.
If you are facing foreclosure, you should take advantage of a free consultation and meet with a bankruptcy attorney as soon as possible. Depending on your income level, you may also need to meet with an accountant to explore the possible tax consequences to you if you are letting the house get foreclosed but not filing for bankruptcy.
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