LAW OFFICE OF BARRY W. ROREX, PLC
AFFORDABLE LEGAL REPRESENTATION (520) 495-7596
THE CONCEPT OF STRATEGIC FORECLOSURE
JUDICIAL vs NON-JUDICIAL FORECLOSURE
Arizona has an anti-deficiency statute, A.R.S. § 33-729(A), which prohibits lenders, in some circumstances, from going after borrowers for the difference between what is owed and what was received by the lender at a Trustee's Sale. Although this statute offers significant protections to many foreclosed borrowers, there are exceptions that make the application of the statute very tricky in some circumstances. Generally, borrowers with purchase money mortgages, on property of 2 1/2 acres or less, used as a single family or two family residence, are protected.
One aspect of foreclosure that is often misunderstood, and a potential trap for property owners, is the taxation of debt cancellation or forgiveness. Debt cancellation often occurs in connection with foreclosures, short sales, repossessions and deed surrenders. The general rule is that the lender will issue a 1099 to the debtor and report the amount of the forgiven debt to the IRS. The IRS treats the forgiven debt as ordinary income taxable to the debtor. This can result in a large tax obligation with no actual income to pay it with. A debtor in this situation should obtain a copy of IRS Publication 4681 - Canceled Debts, Foreclosures, Repossessions and Abandonments. In Chapter 1, there is a section on exclusions, including bankruptcy.
Fortunately, there is currently a window for many homeowners to avoid this taxation. The Mortgage Debt Relief Act of 2007 allows many homeowners to exclude from taxable income the discharge of debt on their principle residence. As currently written, the exclusions are scheduled to expire in 2012. There are limitations on the amount and types of property subject to the exclusion so this is a topic that should be discussed in detail with an attorney or tax professional.