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.
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.
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.
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.
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.
If you’re considering filing for bankruptcy in Chicago, Illinois, you need an experienced Chicago bankruptcy attorney in your corner. At Chicago Bankruptcy Clinic, our experienced and knowledgeable Chicago bankruptcy attorneys will handle all the details of your Chicago bankruptcy case, ensuring that no important details are overlooked. When you come to us for help, you can rest assured that we’ll do everything in our power to achieve a positive outcome in your bankruptcy case. Please contact us today to schedule a consultation with one of our talented Chicago bankruptcy attorneys.
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