We wanted to talk a bit about the foreclosures, HELOC’s and 2nd Mortgages with respect to their effects on the credit score, how they report and whether debts can be pursued.
After the crash of the real estate market several years ago, you may have had a foreclosure occur. While this is a horrible thing to have happen, there is recourse, and in fact, life after a foreclosure. Typically when the lender forecloses on a property, after a period of months or sometimes years of payment delinquency, the property will either be sold at auction or in a private sale. Once this occurs, the balance should be reporting as $0. Depending on the state you live in, the bank can elect to pursue you for the balance, which is considered a Judicial Foreclosure. These however are less common. Typically, the mortgage is secured by the property and the lender takes a loss on the property if it should be sold for the less than the balance owed on the note. It is also possible that the loss will be reported as income to you and the IRS will receive a 1099-C form claiming as such.
What this means, is that you may have to pay taxes on the amount the bank lost. Again, this is dependent on the lenders protocol as well as state law. The Fair Credit Reporting Act does not reference foreclosures so unfortunately, there is a lot of grey regarding these types of loans.
There isn’t even a specific time in which the foreclosure falls off the report. Usually the Date of Last Activity (DLA) is what begins the time line in which an item can no longer report, but there is some question as to when that is. Is it when the last payment is made from the consumer to the bank? Is it when the bank sells the property? Again, it’s a grey area. This information would most likely be given to the consumer in part of a response they would receive when requesting validation or verification of the account. Which is what we do here at Credit Dr.
This is how the law reads in the Fair Credit Reporting Act:
Fair Credit Reporting Act, § 605. Requirements relating to information contained in consumer reports [15 U.S.C. § 1681c]
(c) Running of Reporting Period
(1) In general. The 7-year period referred to in paragraphs (4) and (6) of subsection
(a) shall begin, with respect to any delinquent account that is placed for collection (internally or by referral to a third party, whichever is earlier), charged to profit and loss, or subjected to any similar action, upon the expiration of the 180-day period beginning on the date of the commencement of the delinquency which immediately preceded the collection activity, charge to profit and loss, or similar action.
In short, a foreclosed property is a very negative mark on your credit report. But, there are ways to determine whether the account is reporting correctly, if in fact a balance should be reporting and for how long it is expected to report. All of which can be gleaned by communicating to the bureaus and requesting this information.
Next week we will chat a bit about HELOC’s and 2nd Mortgages, which is a different animal.
Until then, be well!
Ed-Jack Dvorak is National Affiliate Liaison at Credit Dr., a national credit restoration company. He works with clients and creditors to improve credit profiles.