Frequently Asked Questions Concerning Debt Workouts and Foreclosure
1. Can you stop the bank from foreclosing my property? In the majority of cases, no, we cannot legally stop a secured creditor from foreclosing its security. We may be able to delay a foreclosure, but generally, if you are in default, your creditor has the right to foreclose. Our goal at formation 2 liquidation is to develop a joint legal and business strategy that will allow your creditor to see that a loan workout is preferable to a foreclosure and therefore in their best interest to pursue.
2. If my bank has foreclosed on my real property, am I liable for a deficiency? In California, if the property is owner occupied, no deficiency is allowed. For other types of real property, it depends on whether the creditor foreclosed judicially or non-judicially. If the creditor foreclosed non-judicially (i.e., at a "trustee's sale"), you are not liable for any deficiency. If the creditor foreclosed judicially, you may be liable for a deficiency if the fair market value of the property was less than your indebtedness. As a practical matter, the vast majority of foreclosures in California are non-judicial.
3. If I agree to a short sale, am I liable for a deficiency. No, not in California.
4. If my bank has foreclosed on my personal property, am I liable for a deficiency? Yes. Unlike real property collateral, if your creditor has foreclosed on personal property security, you may be liable for a deficiency under California law.
5. What rights and defenses do I have if I personally guaranteed a loan that is in default? California has a comprehensive statutory scheme concerning the rights and defenses of guarantors. Unfortunately, these rights can and usually are waived in their entirety. As a result, defending a guarantor is legally challenging, but not impossible. Because the guarantor is often the "real party in interest", developing a joint legal and business strategy is never as important as in cases involving a guarantor.
6. Are there tax consequences of a loan workout or foreclosure? Yes, and they are not necessarily intuitive. If a loan is modified (but not foreclosed), the borrower may have cancellation of debt ("COD") income, although there are several important exemptions that may apply. If your property is foreclosed, the foreclosure is treated as a sale for tax purposes, although the deemed sale price depends on whether the loan is recourse or nonrecourse.
2. If my bank has foreclosed on my real property, am I liable for a deficiency? In California, if the property is owner occupied, no deficiency is allowed. For other types of real property, it depends on whether the creditor foreclosed judicially or non-judicially. If the creditor foreclosed non-judicially (i.e., at a "trustee's sale"), you are not liable for any deficiency. If the creditor foreclosed judicially, you may be liable for a deficiency if the fair market value of the property was less than your indebtedness. As a practical matter, the vast majority of foreclosures in California are non-judicial.
3. If I agree to a short sale, am I liable for a deficiency. No, not in California.
4. If my bank has foreclosed on my personal property, am I liable for a deficiency? Yes. Unlike real property collateral, if your creditor has foreclosed on personal property security, you may be liable for a deficiency under California law.
5. What rights and defenses do I have if I personally guaranteed a loan that is in default? California has a comprehensive statutory scheme concerning the rights and defenses of guarantors. Unfortunately, these rights can and usually are waived in their entirety. As a result, defending a guarantor is legally challenging, but not impossible. Because the guarantor is often the "real party in interest", developing a joint legal and business strategy is never as important as in cases involving a guarantor.
6. Are there tax consequences of a loan workout or foreclosure? Yes, and they are not necessarily intuitive. If a loan is modified (but not foreclosed), the borrower may have cancellation of debt ("COD") income, although there are several important exemptions that may apply. If your property is foreclosed, the foreclosure is treated as a sale for tax purposes, although the deemed sale price depends on whether the loan is recourse or nonrecourse.