Home > Mortgages > There’s No Such Thing As a Free House, Even When You Win the Foreclosure Battle

Comments 0 Comments
Advertiser Disclosure


Some homeowners are emerging from the housing crisis with “free houses,” according to a recent article in the New York Times.

According to the article, some homeowners are seeing the foreclosure cases brought against them dismissed because lenders missed key deadlines or because the statute of limitations has expired (here’s a nifty guide on states’ statutes of limitations on debt collection). Commenters vociferously debated whether these homeowners should be congratulated for winning their battles against their lenders or vilified for shirking their financial responsibilities.

In truth, the chance that most homeowners who fight foreclosure will walk away owning their homes free and clear are slim. They are “similar to unicorns,” says consumer law attorney Troy Doucet who practices foreclosure defense. “Their sightings are incredibly – incredibly – rare.”

Attorney and CPA Jo Ann Koontz also warns that there is a lot of confusion around this issue. “People think having a foreclosure case thrown out or having the lien released means the debt has gone away,” she says. “That’s not always the case.”

Even when homeowners “win,” there may be complications.

The Tax Aftershock 

Canceled or forgiven debt can result in the issuance of a 1099-C to the homeowner — here’s a primer on how a 1099-C for canceled debt can increase your tax bill.

Under the current Tax Code, most canceled debt must be reported as income unless the borrower qualifies for an exclusion or exception. Taxpayers in this situation may qualify for the insolvency exclusion or the Mortgage Forgiveness Debt Relief Act exclusion, which will allow them to avoid taxes on all or part of this income. But if they don’t, they could find themselves with a big bill from the IRS.

“Anytime the debt is canceled a 1099-C is issued,” says Koontz, who noted that she and her colleagues have been getting panicked calls from taxpayers who thought they automatically could avoid taxes on canceled mortgage debt, but found out that wasn’t necessarily the case.

A Home in Limbo

The Times article warns that lenders may place liens on these homes so that when the property is eventually sold they will be paid from the proceeds. A lien on the home could remain indefinitely. Doucet explains:

The lien would remain on the property until the client had it removed, unless the bank agreed to voluntarily remove it. If the bank didn’t voluntarily remove the lien, the homeowner would almost certainly need to file a quiet title action to remove it. However, ‘free houses’ are so rare, I doubt any recorder’s office would allow the release of the mortgage short of a court order. Even if the recorder did have it removed, future title companies would likely be uncomfortable issuing title insurance without a court order.

Koontz agrees that just because the debt goes away that doesn’t automatically mean the lien does. Legally, she says, “If the debt is forgiven then the lien goes away.” But from a practical standpoint it may not be so simple. She says borrowers in this situation should ask the lender to file a release of lien or satisfaction, which will remove the lien from the property and the public record.

As far as credit reports go, defaulted mortgage loans may appear on consumer’s credit reports for seven years from the date they were charged off. You can get your free annual credit reports on AnnualCreditReport.com and you can get a free credit report summary every month on Credit.com.

If the lien remains, the homeowner is in some sense getting free “rent” rather than a free house. If the home’s value appreciates, the homeowner could sell the home, pay off the loan and still walk away with cash in his or her pocket. But if it remains underwater it’s a different story.

In the meantime, the homeowner will still incur costs, including homeowner’s insurance, taxes and maintenance. That still may be a bargain compared to rent in many cases, but it’s a far cry from walking away with a free and clear title to a property.

And it could be worse, Doucet warns. If the lien is determined to be valid, interest may continue to accrue, “eating away any equity on a compounded interest basis.” He warns that homeowners could also end up spending significant time and money trying to get the lien removed through litigation. Says Doucet: “Thus, that free house doesn’t really end up being free.”

More on Managing Debt:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team