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Result of Foreclosing for Less Than What is Owed
I had to foreclose my house and the property sold at auction for less than what I owe. Do I pay taxes or the mortgage first? What happens next?
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 At the foreclosure, a bid was made and accepted. That bid amount is then applied against the loan and the property has a new owner. You won't have any tax liability from that point forward and the new owner will only be able to accept it with either the taxes paid to date, or they assume that liability when the tax payment is due again.
The bid amount, applied against the loan balance outstanding, establishes the deficit balance still owed the lender. You can contact them if you want to try and arrange a payment schedule, or they'll likely contact you. If they are unable to collect the debt, they may "forgive" it which means they won't try and collect it at all. You and the lender understand your circumstances better than I could here, so I don't know how likely this is to happen. If they forgive the debt, it is considered taxable income and you would be expected to pay federal taxes to the IRS on that amount.
Do not confuse forgiveness of debt with a charged-off debt. The latter is a bookkeeping entry on the part of the lender and it doesn't remove the obligation. It just says this is no longer a good asset. The money would still be owed.
If you begin making payments, get that noted on your credit report. The foreclosure and delinquency that likely lead up to it will be bad, but the least you could do would be to salvage a little good from it and get credit for what you do.
Published on BankingQuestions.com 8/28/07
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