If you are facing foreclosure and plan on filing for chapter 7 bankruptcy, the order in which you do things can have consequences. Of course, depending on the timing, you may not have a choice of whether to file for bankruptcy prior to foreclosure. However, if you are early enough in the process, you can choose whether to file for bankruptcy before your home is foreclosed. In this article, we examine the issue of filing for chapter 7 bankruptcy prior to foreclosure.
Deficiency After Foreclosure
After a foreclosure sale, the price received for the home is usually much less than the outstanding amount of the mortgage. Whether a lender can come after you for the deficiency amount depends on your state. Unfortunately, in Illinois, a lender can collect a deficiency judgement following a foreclosure sale. In other words, if your home is sold for less than you owe, the lender can come after you for the excess amount.
Taxes After Forgiveness
If your home is foreclosed and your lender cancels your debt instead of coming after you for the deficiency, the IRS views this as taxable income. This means you’ll have to pay income tax on the forgiven amount. However, depending on your circumstances, you may qualify for an exemption to this rule.
Deficiency and Bankruptcy
Filing for bankruptcy will eliminate some of your debts. If your lender attempts to collect for the deficiency, and you then file for bankruptcy, bankruptcy will eliminate the deficiency debt. On the other hand, if your lender forgives your deficiency before you file for bankruptcy, and you don’t qualify for an exception, you will likely still have to pay taxes on the forgiven deficiency amount.
If you file for bankruptcy prior to foreclosure, however, your mortgage debt will be discharged. Since you will no longer have any mortgage debt, there will be no deficiency and no tax liability for the discharged debt. This is a huge benefit of filing for bankruptcy before foreclosure.
An Additional Benefit of Filing First
When you file for bankruptcy, the court enters an automatic stay, which is a court order that prohibits your creditors from trying to collect from you—this includes any action related to a pending foreclosure. So, while your bankruptcy case makes its way through the court system, which could take several months, you can build up your savings by living in your home without having to make any payments.
Contact Our Experienced Chicago Bankruptcy Attorneys
If you’re considering filing for bankruptcy in Illinois, you need a Chicago bankruptcy attorney on your side. At Chicago Bankruptcy Clinic, our experienced and knowledgeable bankruptcy attorneys will handle your Chicago bankruptcy case with professionalism and compassion. When you come to us for assistance, you can rest assured that we’ll do everything in our power to make your Chicago bankruptcy a success. Please contact us as soon as possible to schedule a free consultation with one of our talented bankruptcy attorneys.