With the economy in the slump it has been for the last several years we are seeing more clients in financial straits. One of the most prevalent results of this economy is repossessions and foreclosures being on the rise. Over the next several days I will explain the ins and outs of this process and how it effects your income taxes.

Let’s start with some definitions:

Foreclosure:

A foreclosure is the legal process by which a lender deprives the debtor of the property that the loan is secured by. Foreclosure is most often seen in reference to a mortgage on real property. And when talking about foreclosures in this text, unless otherwise identified, you can assume the mortgaged property is real property.

Repossession:

Repossession is the physical process of seizing by the lender of secured collateral for non-payment of a debt. Real property is technically repossessed, however, most of the time institutions will use the term foreclosure to mean both the legal and physical process of seizing real property. For the purpose of this text, unless otherwise indicated, repossession will have to do with the seizure of non-real property.

Collateral:

A piece of property that is pledged by the debtor to secure the repayment of a loan.

Mortgage:

The transfer of an interest in a property, in writing, to the lender as security for the repayment of a loan. This is mainly to do with real property.

Recourse Debt:

The debtor is personally liable for the repayment of the entire debt, including any deficiency after the sale of the collateral.

Non-Recourse Debt:

The debtor is not personally responsible for the debt and can not be held liable for any remaining debt after the seizure of the collateral.

Tomorrow, how a foreclosure normally flows.

In accordance with Circular 230 Disclosure