Notice of Default

• When your home enters preforeclosure, you are served with a Notice of Default. The Notice of Default is the lender's attempt to recoup your past-due mortgage payments. At this time, it is your responsibility to catch up your payments if you want to avoid foreclosure. Notice of Default letters include a deadline by which your payment must be received in full, or the foreclosure process begins. Failure to pay means risking the responsibility of having to pay the entire debt in full.
  
  

Deficiency Judgment

• At the end of the foreclosure process, the lender makes the decision to cancel your debt, partially cancel the debt or not cancel any of your debt. With a partial cancellation or no cancellation, lenders generally file a deficiency judgment in an attempt to recoup the entire balance of the mortgage debt. The length of time a lender can file a deficiency judgment varies by state.
  
  In some states, lenders can wait years until you regain financial stability before filing a judgment. In other states, you receive your penalty at the time of foreclosure. It is your responsibility to consult with a foreclosure counselor to learn the deficiency judgment laws in your state.
  
  

Cancellation of Debt Tax

• If your mortgage debt is cancelled at the time of foreclosure, your release from the debt obligation can lead to increased tax liability. As long as you are responsible for repaying your mortgage loan, the money cannot be considered income. However, once the debt is forgiven, the IRS can tax the mortgage loan as a type of income. Until December 2012, homeowners with forgiven mortgage debt are excluded from cancellation of debt taxation as long as the home is their primary residence and the amount of the forgiven debt is less than $2 million.
  
  

Considerations

• Increased financial responsibility can be lessened if you file bankruptcy or claim insolvency. You are insolvent if the fair market value of your assets is less than your liability. The IRS recognizes insolvency as a viable exclusion from cancellation of debt taxation. Insolvency has no influence on a deficiency judgment. Instead, bankruptcy helps you to lessen the impacts of a deficiency judgment on your finances. However, after filing bankruptcy, your credit score drops as much as 240 points and the bankruptcy remains on your credit report for up to 10 years.