Foreclosure Prevention

Foreclosure Process and Mediation Program in Nevada

To buy a home most people borrow money from a bank or another lender. In exchange for the loan, the lender holds a lien against the property. If the borrower misses payments, then the loan goes into default and the lender can sell the property to pay off the loan. This process is called mortgage foreclosure.

How do I know if my lender has begun foreclosure proceedings against me?

A Notice of Default will be recorded against your property and sent via registered or certified mail with a return receipt to the homeowner and each guarantor or surety to the mortgage. The Notice of Default must describe the deficiency and include (1) contact information for a person with the authority to negotiate a loan modification, (2) contact information of at least one HUD approved housing counseling agency the homeowner can contact for assistance, and (3) contact information for the Foreclosure Mediation Program. The Notice of Default must also be posted on the property within 3 days of recording. This rule applies to all single family residences or small complexes that have 4 or less units (one of which the homeowner must live in).

How soon can my lender record the Notice of Default and Election to Sell?

Your lender must wait at least 30 days after you miss your first mortgage payment before it must send you a letter telling the homeowner of the lender’s right to foreclose and offering a list of foreclosure alternatives. If the homeowner does not resolve the delinquency within the next 90 days, the bank can record a Notice of Default. Additionally, under new guidance from the Consumer Financial Protection Bureau, the Notice of Default can be recorded no earlier than 120 days after the homeowner defaults.

What is mediation?

Mediation is an opportunity for homeowners and lenders to meet and discuss alternatives to foreclosure. Mediation is mandatory for your lender if you complete the Enrollment in Mediation form and submit a non-refundable $200 fee to the State of Nevada Foreclosure Mediation Program. Your lender is required to mail you the Enrollment in Mediation form when the Notice of Default is mailed to you. You and your lender will sit down with a mediator to discuss ways to avoid or lessen the hardship of foreclosure. The mediation requires good faith on the part of both you and your lender. This means you cannot request mediation to simply delay the foreclosure sale.

How do I know if I am eligible to participate in mediation and how do I request it?

Mediation applies to residential properties located in Nevada that are owner-occupied and the primary residence of the owners. Your lender will include the mediation request forms with your Notice of Default. You will also receive two pre-addressed envelopes to send a copy of the mediation request and financial forms to both the Foreclosure Mediation Program and the foreclosure trustee (the agency that recorded the Notice of Default). You must elect mediation within 30 days by sending notice to the mediator and your lender otherwise you will have been deemed to have waived (given up) mediation. You must also send $200 to the Foreclosure Program Administrator if you wish to request mediation.

Am I the only one that pays for the mediation, or does the lender have to contribute?

No. Your lender must also pay for mediation. The total cost of mediation is $400 and goes to the mediator. This cost is shared 50/50 between the homeowner and the lender. This is why you only send $200 to the Foreclosure Program Administrator.

What additional documents or information do I need for mediation?

After submitting the mediation forms and $200, the mediator will contact both parties to schedule a document exchange. Both the homeowner and the lender are required to exchange various documents throughout the mediation process. Most of the information the homeowner will submit to the lender will include documentation the lender requires to evaluate a homeowner for a loan modification. Generally, homeowners will be evaluated for eligibility under the Making Home Affordable program (HAMP) as a starting point. For further information regarding the Making Home Affordable program, please click here.  For additional forms regarding the mediation process, the Civil Law Self Help Center has forms to petition the court and other information.

In order to have the best possible chance to work something out at mediation, you should have (1) a steady income or the prospects of a steady income in the near future; or (2) you are willing to give up your home (short sale) and want more time and/or money to move (cash for keys). Good faith also requires your lender to accept a reasonable offer.

How long before a mediator is assigned to my case?
 
The Foreclosure Mediation Program will assign a mediator 10 days after receiving the Election form from both the homeowner and the foreclosure trustee. The mediation must then take place within 45 days of the mediator’s assignment. The mediation process should not take longer than 135 days, from the day the Mediation Program receives both your Election of Mediation form and the form from the foreclosure trustee.
 
What forms and documents is the lender required to provide at mediation?
 
The foreclosure trustee, lender, servicer, or other representative (whoever shows up for the bank at the mediation) must also submit certain documents. The representative must submit an appraisal no more than 60 days old, an estimate of short sale value, a non-binding proposal to resolve the foreclosure, and the original or a certified copy of the Deed of Trust, each assignment of the Deed of Trust, the Note, and each endorsement of the Note. If the original documents are lost or destroyed, the mediator can accept a court order to enforce a lost, destroyed, or stolen instrument. These documents must be submitted to the mediator and exchanged between parties at least 10 days before the mediation.

What happens if the lender does not bring the required documents to mediation?

If the bank or its representative does not turn over an original or certified copy of the Note, Deed of Trust, each assignment of the Deed of Trust, and each endorsement of the Note, the penalty is sanctions, which can include unilateral modification of the loan. At the very least, the mediator will not certify mediation as complete so the Foreclosure Mediation Program will not issue the certificate that allows the bank to proceed with the foreclosure. The parties must then file a petition in court to proceed with the foreclosure or seek sanctions. The petition seeking judicial review of the mediation must be filed within 30 days after you receive the Mediator’s Statement from the mediation. If the lender does not bring all required documents to mediation and does not file a petition for judicial review, it must rescind its Notice of Default and restart the process by recording a new Notice of Default. Typically, restarting the process can take the bank 6 months to a year. Once a new Notice of Default is recorded, the homeowner has the opportunity to enroll in mediation once again.

What if I don’t want to participate in mediation?

 

If you do not wish to request mediation and instead elect to waive mediation, the foreclosure trustee (company proceeding with the forced sale of your home) can apply for a certificate that no mediation is required from the Foreclosure Medication Program Administrator by filling out and submitting their Trustee’s Affidavit. Once the certificate that no mediation is required is received from the Foreclosure Mediation Program, the foreclosure trustee must record the certificate and send it to the homeowner. If the homeowner does not respond to the notice advising of the right to request mediation within the 30 days to do so, the foreclosure trustee can seek the certificate that no mediation is required to proceed with the foreclosure sale.

Once the certificate that no mediation is required is recorded and sent to the homeowner, the foreclosure trustee can continue with the foreclosure pursuant to NRS 107.080. This means that the trustee can issue the Notice of Sale 3 months after recording the Notice of Default.

What happens if I am not satisfied with the outcome of mediation?

 

If either party is not satisfied with the outcome, a Petition for Judicial Review can be filed. This must be done within 30 days of the receipt of the mediator’s statement. These petitions must be filed with the District Court in the county where the notice of default was recorded.

Are there any additional benefits if I am an active duty service member?

The Service Members Civil Relief Act of 2003 (formerly the Soldiers’ and Sailors’ Civil Relief Act of 1940) provides additional benefits to service members on active duty.

A court order is required before a home is sold at a foreclosure sale while a service member is on activity duty or within 90 days after the end of active duty. This law applies even in non-judicial foreclosure states like Nevada. Therefore, a lender cannot foreclosure on a home through the trust deed foreclosure process. Instead, the foreclosing party must file a foreclosure action in court.

If the home is sold at a foreclosure sale without a court order, the sale may be rendered invalid and could subject the lender to criminal prosecution.

The court can also stay foreclosure proceedings while the service member is on activity duty. The military service must materially affect the service member’s ability to pay, though, in order to obtain the stay of the foreclosure proceedings. A foreclosure obtained by default during active duty or within 60 days after the end of active duty may be reopened or set aside by the court.

Active duty service members can also request a reduction in the interest rate on any debt incurred prior to active duty. The interest rate must be reduced to 6% while the service member is on active duty. The service member must request the interest rate reduction from the lender and provide proof of the return to active duty in order to qualify. If the ability to pay on the debt, though, is not materially affected by the military service, a court can decide to raise the interest rate above 6%.

When can the bank sell my home?

 

The Notice of Sale may be issued to the homeowner 3 months after the Notice of Default is recorded and the Foreclosure Mediation Program has issued the certificate that mediation is complete. The Foreclosure Mediation Program certificate must be recorded and should be done before the date the Notice of Sale is recorded. Prior to issuing the Notice of Sale, the foreclosure trustee must issue the homeowner a danger notice. The danger notice must be sent to the homeowner at least 60 days before the sale and notify the homeowner of a legal services organization or a HUD approved housing counseling agency the homeowner might contact for assistance, among other potentially helpful contact information.

The foreclosure trustee must record the Notice of Sale and give notice of the time and place of the sale by (1) personally serving or mailing the notice by registered or certified mail to the homeowner and all others entitled to notice (which includes any surety on the mortgage or the subordinate lien holder); (2) posting the notice in a public place where the property is located for 20 successive days; (3) publishing a copy of the notice 3 times (once a week for 3 weeks); AND (4) posting a notice on the property at least 15 days before the sale date. This generally means that the sale date cannot be sooner than 3 weeks after the recording of the Notice of Sale.

The homeowner still has up to 5 days before the actual date of sale to cure the default and reinstate the mortgage. If nothing is done to stop the foreclosure prior to the sale, the home can be sold at auction on the date and time listed on the Notice of Sale.

What happens at a foreclosure sale?

At the foreclosure sale, the lender (or some one else) purchases the property (gaining title). Afterward the lender or other new owner may serve you with a 3 day notice to quit. If you remain after 3 days, the lender may serve you with a summons and complaint asking a court to evict you. This court action is called an unlawful detainer action. The new purchaser may not enter your home or change the locks until after serving a summons and complaint for unlawful detainer and completing the lawsuit. For more information about evictions during or after a foreclosure, please see our Foreclosure Evictions page for more information.

NOTE: The information contained on these pages is for general background information only. If you have a legal question, it is best to consult with an attorney.

Does my lender have to go to court to initiate a foreclosure against me and my property?

No. The majority of foreclosures in Nevada are trust deed foreclosures. A trust deed foreclosure is non-judicial, meaning your bank, lender, or mortgage servicer does not need to go to court to foreclose and sell your home. If you have missed a mortgage payment, the lender or servicer begins the foreclosure process by mailing and recording a Notice of Default or Breach and Election to Sell. This is notice to you that the legal foreclosure process has begun and you will have about 4 months to cure the arrearage or work something out with your lender to save your home from a foreclosure sale.

How do I know if my lender has begun foreclosure proceedings against me?

A Notice of Default will be recorded against your property and sent via registered or certified mail with a return receipt to the homeowner and each guarantor or surety to the mortgage. The Notice of Default must describe the deficiency and include (1) contact information for a person with the authority to negotiate a loan modification, (2) contact information of at least one HUD approved housing counseling agency the homeowner can contact for assistance, and (3) contact information for the Foreclosure Mediation Program. The Notice of Default must also be posted on the property within 3 days of recording. This rule applies to all single family residences or small complexes that have 4 or less units (one of which the homeowner must live in).

 

How soon can my lender record the Notice of Default and Election to Sell?

Your lender must wait at least 30 days after you miss your first mortgage payment before it must send you a letter telling the homeowner of the lender’s right to foreclose and offering a list of foreclosure alternatives. If the homeowner does not resolve the delinquency within the next 90 days, the bank can record a Notice of Default. Additionally, under new guidance from the Consumer Financial Protection Bureau, the Notice of Default can be recorded no earlier than 120 days after the homeowner defaults. 

How can I stop the foreclosure proceedings?

One way to temporarily halt the foreclosure proceedings is to request mediation through Nevada’s Foreclosure Mediation program.  You can also file a Chapter 13 bankruptcy if you have the ability to enter into a payment plan to cure default.  The Bankruptcy Court also has a mediation program for homeowners.  If your lender will not work with you, the only other way to stop the foreclosure process is to file suite against the lender and ask the court to enjoin (stop) the foreclosure sale. 

What is Foreclosure Mediation?

Mediation is an opportunity for homeowners and lenders to meet and discuss alternatives to foreclosure. Mediation is mandatory for your lender if you complete the Enrollment in Mediation form and submit a non-refundable $250 fee to the State of Nevada Foreclosure Mediation Program. Your lender is required to mail you the Enrollment in Mediation form when the Notice of Default is mailed to you. You and your lender will sit down with a mediator to discuss ways to avoid or lessen the hardship of foreclosure. The mediation requires good faith on the part of both you and your lender. This means you cannot request mediation to simply delay the foreclosure sale.

How do I know if I am eligible to participate in mediation and how do I request it?

Mediation applies to residential properties located in Nevada that are owner-occupied and the primary residence of the owners. Your lender will include the mediation request forms with your Notice of Default. You will also receive two pre-addressed envelopes to send a copy of the mediation request and financial forms to both the Foreclosure Mediation Program and the foreclosure trustee (the agency that recorded the Notice of Default). You must elect mediation within 30 days by sending notice to the mediator and your lender otherwise you will have been deemed to have waived (given up) mediation. You must also send $200 to the Foreclosure Program Administrator if you wish to request mediation.

Am I the only one that pays for the mediation, or does the lender have to contribute?

No. Your lender must also pay for mediation. The total cost of mediation is $400 and goes to the mediator. This cost is shared 50/50 between the homeowner and the lender. This is why you only send $200 to the Foreclosure Program Administrator.

What additional documents or information do I need for mediation?

After submitting the mediation forms and $200, the mediator will contact both parties to schedule a document exchange. Both the homeowner and the lender are required to exchange various documents throughout the mediation process. Most of the information the homeowner will submit to the lender will include documentation the lender requires to evaluate a homeowner for a loan modification. Generally, homeowners will be evaluated for eligibility under the Making Home Affordable program (HAMP) as a starting point. For further information regarding the Making Home Affordable program, please click here.  For additional forms regarding the mediation process, the Civil Law Self Help Center has forms to petition the court and other information.

In order to have the best possible chance to work something out at mediation, you should have (1) a steady income or the prospects of a steady income in the near future; or (2) you are willing to give up your home (short sale) and want more time and/or money to move (cash for keys). Good faith also requires your lender to accept a reasonable offer.

How long before a mediator is assigned to my case?

The Foreclosure Mediation Program will assign a mediator 10 days after receiving the Election form from both the homeowner and the foreclosure trustee. The mediation must then take place within 45 days of the mediator’s assignment. The mediation process should not take longer than 135 days, from the day the Mediation Program receives both your Election of Mediation form and the form from the foreclosure trustee.

What forms and documents is the lender required to provide at mediation?

The foreclosure trustee, lender, servicer, or other representative (whoever shows up for the bank at the mediation) must also submit certain documents. The representative must submit an appraisal no more than 60 days old, an estimate of short sale value, a non-binding proposal to resolve the foreclosure, and the original or a certified copy of the Deed of Trust, each assignment of the Deed of Trust, the Note, and each endorsement of the Note. If the original documents are lost or destroyed, the mediator can accept a court order to enforce a lost, destroyed, or stolen instrument. These documents must be submitted to the mediator and exchanged between parties at least 10 days before the mediation.

What happens if the lender does not bring the required documents to mediation?

If the bank or its representative does not turn over an original or certified copy of the Note, Deed of Trust, each assignment of the Deed of Trust, and each endorsement of the Note, the penalty is sanctions, which can include unilateral modification of the loan. At the very least, the mediator will not certify mediation as complete so the Foreclosure Mediation Program will not issue the certificate that allows the bank to proceed with the foreclosure. The parties must then file a petition in court to proceed with the foreclosure or seek sanctions. The petition seeking judicial review of the mediation must be filed within 30 days after you receive the Mediator’s Statement from the mediation. If the lender does not bring all required documents to mediation and does not file a petition for judicial review, it must rescind its Notice of Default and restart the process by recording a new Notice of Default. Typically, restarting the process can take the bank 6 months to a year. Once a new Notice of Default is recorded, the homeowner has the opportunity to enroll in mediation once again.

What if I don’t want to participate in mediation?

If you do not wish to request mediation and instead elect to waive mediation, the foreclosure trustee (company proceeding with the forced sale of your home) can apply for a certificate that no mediation is required from the Foreclosure Medication Program Administrator by filling out and submitting their Trustee’s Affidavit. Once the certificate that no mediation is required is received from the Foreclosure Mediation Program, the foreclosure trustee must record the certificate and send it to the homeowner. If the homeowner does not respond to the notice advising of the right to request mediation within the 30 days to do so, the foreclosure trustee can seek the certificate that no mediation is required to proceed with the foreclosure sale.

Once the certificate that no mediation is required is recorded and sent to the homeowner, the foreclosure trustee can continue with the foreclosure pursuant to NRS 107.080. This means that the trustee can issue the Notice of Sale 3 months after recording the Notice of Default.

What happens if I am not satisfied with the outcome of mediation?

If either party is not satisfied with the outcome, a Petition for Judicial Review can be filed. This must be done within 30 days of the receipt of the mediator’s statement. These petitions must be filed with the District Court in the county where the notice of default was recorded.

Are there any additional benefits if I am an active duty service member?

The Service Members Civil Relief Act of 2003 (formerly the Soldiers’ and Sailors’ Civil Relief Act of 1940) provides additional benefits to service members on active duty.

A court order is required before a home is sold at a foreclosure sale while a service member is on activity duty or within 90 days after the end of active duty. This law applies even in non-judicial foreclosure states like Nevada. Therefore, a lender cannot foreclosure on a home through the trust deed foreclosure process. Instead, the foreclosing party must file a foreclosure action in court.

If the home is sold at a foreclosure sale without a court order, the sale may be rendered invalid and could subject the lender to criminal prosecution.

The court can also stay foreclosure proceedings while the service member is on activity duty. The military service must materially affect the service member’s ability to pay, though, in order to obtain the stay of the foreclosure proceedings. A foreclosure obtained by default during active duty or within 60 days after the end of active duty may be reopened or set aside by the court.

Active duty service members can also request a reduction in the interest rate on any debt incurred prior to active duty. The interest rate must be reduced to 6% while the service member is on active duty. The service member must request the interest rate reduction from the lender and provide proof of the return to active duty in order to qualify. If the ability to pay on the debt, though, is not materially affected by the military service, a court can decide to raise the interest rate above 6%.

When can the bank sell my home?

The Notice of Sale may be issued to the homeowner 3 months after the Notice of Default is recorded and the Foreclosure Mediation Program has issued the certificate that mediation is complete. The Foreclosure Mediation Program certificate must be recorded and should be done before the date the Notice of Sale is recorded. Prior to issuing the Notice of Sale, the foreclosure trustee must issue the homeowner a danger notice. The danger notice must be sent to the homeowner at least 60 days before the sale and notify the homeowner of a legal services organization or a HUD approved housing counseling agency the homeowner might contact for assistance, among other potentially helpful contact information.

The foreclosure trustee must record the Notice of Sale and give notice of the time and place of the sale by (1) personally serving or mailing the notice by registered or certified mail to the homeowner and all others entitled to notice (which includes any surety on the mortgage or the subordinate lien holder); (2) posting the notice in a public place where the property is located for 20 successive days; (3) publishing a copy of the notice 3 times (once a week for 3 weeks); AND (4) posting a notice on the property at least 15 days before the sale date. This generally means that the sale date cannot be sooner than 3 weeks after the recording of the Notice of Sale.

The homeowner still has up to 5 days before the actual date of sale to cure the default and reinstate the mortgage. If nothing is done to stop the foreclosure prior to the sale, the home can be sold at auction on the date and time listed on the Notice of Sale.

What happens at a foreclosure sale?

At the foreclosure sale, the lender (or some one else) purchases the property (gaining title). Afterward the lender or other new owner may serve you with a 3 day notice to quit. If you remain after 3 days, the lender may serve you with a summons and complaint asking a court to evict you. This court action is called an unlawful detainer action. The new purchaser may not enter your home or change the locks until after serving a summons and complaint for unlawful detainer and completing the lawsuit. For more information about evictions during or after a foreclosure, please see our Foreclosure Evictions page for more information.

NOTE: The information contained on these pages is for general background information only. If you have a legal question, it is best to consult with an attorney.

Homeowners Associations and Foreclosure

If a homeowner defaults in paying the monthly assessments, an HOA can foreclose. A common misconception is that the association cannot foreclose if you are current with your mortgage payments. However, the association’s right to foreclose has nothing to do with whether you are current on your mortgage payments.

In Nevada, the HOA may hold a foreclose sale after sending the homeowner a notice of delinquent assessment lien, recording a notice of default and election to sell, and providing notice of the foreclosure sale to the owner.

NOTICE OF DELINQUENT ASSESSMENTS

Before starting the foreclosure, the HOA must mail a notice of delinquent assessment to the homeowner, which states:

  • The amount of the assessments and other sums that are due
  • A description of the unit against which the lien is imposed, and
  • The name of the record owner of the unit

NOTICE OF DEFAULT

Not less than 30 days after mailing the notice of delinquent assessment, the association may then record a notice of default and election to sell (NOD) with the county recorder. (The NOD must contain the same information as the notice of delinquent assessment lien, along with a warning that if you do not pay the delinquent amount you could lose your home.) The HOA must also mail a copy of the NOD to the homeowner.

FORECLOSURE SALE

If the owner does not pay the amount of the lien, including costs, fees, and expenses within 90 days following the recording of the NOD, the home can be sold at a foreclosure sale. The HOA must provide notice of the date and time of the sale to the owner.

What can I do if I fall behind in my HOA dues?

If you are behind on your HOA dues, there are several options for you to get caught up before the HOA initiates a foreclosure.

PAY OFF THE DELIQUENCY OUTRIGHT: The quickest way to get caught up and prevent the HOA from pursuing a foreclosure is to pay all of the past-due amounts in one lump sum, including any late fees or other fees.

NEGOTIATION ON A REDUCED PAYOFF OF THE DELIQUENCY: If you cannot come up with enough cash to cure the missed HOA dues all at once, you may be able to convince the HOA to accept a reduced amount to satisfy the debt. However, most HOAs simply will not accept a reduced payoff.ENTER INTO A PAYMENT PLAN: Your HOA may will consider allowing you to enter into a repayment plan to get caught up on your HOA dues. The typical length of repayment is 6 months to 2 years.FILE FOR BANKRUPTCY:

If you are behind in HOA dues and are thinking about filing for bankruptcy, there are some special considerations you should keep in mind. You can temporarily stop an HOA from foreclosing by filing a Chapter 7 bankruptcy. You can halt a foreclosure by filing for bankruptcy due to the automatic stay, which immediately goes into effect when you file. The stay functions as an injunction prohibiting the HOA from foreclosing on your home during the bankruptcy process. However, this will likely only provide a temporary reprieve because the HOA can seek permission from the bankruptcy court to continue with the foreclosure.

Chapter 7 bankruptcy

If you file for Chapter 7 bankruptcy, you may be able to discharge (eliminate) your personal liability of any HOA dues that you owe. Unfortunately, the HOA lien remains against the property and the bank can still foreclose. This is beneficial if you intend to surrender your home, but if you plan on staying in the home, you’ll have to pay the dues to avoid a foreclosure.

Chapter 13 bankruptcy

In a Chapter 13 bankruptcy, HOA dues that accrued before you file are treated as secured claims. This means that if there is equity in your property at the time you file your bankruptcy, your Chapter 13 plan must provide for payment to the HOA. If your house is underwater (where you owe more on the mortgage than the house is worth), then the HOA lien can be stripped, but you’ll still have to pay future dues if you plan to continue living in the home.

ALTERNATIVE DISPUTE RESOLUTION (ADR):

The ADR process is required under NRS 38.300 to 38.360, before parties may file a civil action in court. The ADR process is available to all unit owners even if they have no intention of filing civil action in court. Beginning October 1, 2013 parties with a dispute about the governing documents of their common interest community must either participate in the Division’s referee program or mediation prior to going to court. The referee program is voluntary and both parties must agree to participate.

If the referee program is not selected by both parties, the dispute will be mediated. If the dispute is not resolved by mediation, parties that initially participated in mediation may agree to have the issue arbitrated. Arbitration may be binding or non-binding.

How does mediation work?

A mediator is a neutral third party who helps you and your lender try to reach a voluntary negotiated agreement. The lender may not foreclose until mediation has been completed. Mediation is fast (less than four hours), inexpensive ($500, shared equally by the parties), and more flexible than more formal processes. The goal of the program is to make foreclosure a remedy of last resort.

To elect mediation, you must complete the Election/Waiver of Mediation Form and mail the original, by certified mail, to the OMBUDSMAN’s Office along with your $250 payment. You must also mail, by certified mail, a copy of the election form to the HOA.

Three parties will be present at the mediation: You, a representative for the HOA, and the mediator. Both you and the HOA must negotiate in good faith.

What is the Ombudsman Informal Conference Program?

An ombudsman is a person who helps resolve complaints, acting as a trusted intermediary between an organization and the public. The Ombudsman for Owners in Common-Interest Communities and Condominium Hotels assists homeowners’ association owners, residents and board members in understanding their rights and responsibilities under the law.

If both parties agree to meet, a conference will be held in an attempt to resolve the issues between the parties. The primary goal of the conference is to try to address the issues and find a resolution. Ombudsman conferences are not hearings. They are voluntary, informal meetings that both sides agree to attend in order to discuss the disputes and find mutually agreeable resolutions.

Deficiency Judgments

In Nevada, if your home is sold through foreclosure and the sale price is not enough to cover the balance of your mortgage; your lender can sue you for the deficiency and try to get a deficiency judgment. However, there are limits to the amount of the deficiency judgment and in certain circumstances the lender is prohibited from receiving a deficiency judgment.

WHAT IS A DEFICIENCY AFTER FORECLOSURE?

 

When a lender forecloses on a mortgage, the total debt owed by the borrowers to the lender frequently exceeds the foreclosure sale price. The difference between the sale price and the total debt is called the deficiency. The reason the bank can sue you for the deficiency is because you signed a mortgage note promising to repay the bank a certain amount of dollars, the bank can sell your property to recoup those dollars, but if you owe more than the home is worth then the bank can sue you personally.

SOME DEFICIENCY JUDGMENTS ARE PROHIBITED:A deficiency judgment is not allowed when all of the following apply:

 

  • the lender is a financial institution (banks, savings and loan associations, credit unions, and thrift companies are examples of financial institutions);
  • the loan is a purchase-money loan that has not been refinanced (this means the loan was used to purchase the home);
  • the property is a single-family residence owned by the borrowers at the time of the foreclosure sale; and
  • the borrowers have continuously occupied the property as their principal residence, and the loan was obtained on or after October 1, 2009. (Nev. Rev. Stat. § 40.455).

LIMITATION ON DEFICIENCY JUDGMENTS:

In Nevada, a lender may obtain a deficiency judgment within six months following foreclosure, but the amount of the judgment is limited to the lesser of:

  • the difference between the total debt and fair market value of the home; or
  • the difference between the total debt and foreclosure sale price (Nev. Rev. Stat. § 40.459).

On June 10, 2011, NRS 40.459(1)(c) was added to Nevada’s law by Assembly Bill 273, which limits the amount of a deficiency judgment a creditor may obtain after foreclosure where the right to obtain the deficiency was transferred from the original lender. NRS 40.459(1)(c) limits the amount of deficiency recoverable by successor creditors to the amount of consideration the successor creditor paid for the right to collect the deficiency. In Sandpointe, the Nevada Supreme Court ruled that Nevada’s new deficiency law, NRS 40.459(1)(c), is only available as a defense to a deficiency lawsuit when the underlying real property was foreclosed upon after the effective date of the statute, or June 10, 2011.

COURT HEARING TO ESTABLISH FAIR MARKET VALUE:

Before awarding a deficiency judgment, the court will hold a hearing to receive evidence from the lender and the borrowers concerning the fair market value of the property as of the date of foreclosure sale. The lender must give the borrower notice of the hearing 15 days prior to the hearing. The court will appoint an appraiser to appraise the property if the lender or borrowers make a request at least 10 days before the hearing date (Nev. Rev. Stat. § 40.457).

THE ONE ACTION RULE:

In some cases, the bank can ignore the lien of the debt on the property and sue in the Court on the mortgage note that the homeowner signed. This is an action on the debt and not a property foreclosure. These actions are never available where the creditor would be barred on any deficiency had the creditor simply foreclosed and even where there is a potential deficiency, these actions may still be barred unless they meet certain criterion. The purposes behind the One Action Rule and the deficiency-judgment statutes are to protect homeowners and prevent the banks from suing the homeowner and receiving a judgment and then foreclosing on the home, in effect double recovery.

The one action rule limits the creditors to a single action for debts related to a single property, that is to say, they cannot initiate both a foreclosure on the property and an action on the note and where there is the chance under the loans to do both, the creditor is directed to first realize against the security, compelling the creditor to first offset the debt with the property.

Where the creditor holds both the first and second title position loans and both were for purchase of the property, it prohibits the creditor from foreclosing on the first loan against the property and waiving the security and suing for the second loan on the promissory note—essentially prohibiting the creditor from taking two actions.

BANKRUPTCY AND DEFICIENCY JUDGMENTS:

Filing for bankruptcy to obtain relief from a deficiency judgment is possible. Under a Chapter 7 bankruptcy, all personal liability on the mortgage note is extinguished so that the bank cannot pursue you for any deficiency that may arise from a foreclosure sale.

HOW DEFICIENCY JUDGMENTS ARE COLLECTED:

A deficiency lawsuit is like a lawsuit to recover an unsecured debt, like credit card debt or medical bills. Before the foreclosure, your mortgage was a secured debt you owed your bank a certain amount of money and your home guaranteed repayment. If you failed to pay back your mortgage loan, the bank had the right to sell your home to recoup the debt. After foreclosure, you may still owe your bank some money (the deficiency), but the security (your house) is gone. The deficiency is now an unsecured debt.

If your lender sues you to recover the deficiency and wins, the court will issue a judgment ordering you to pay off the deficiency. If you ignore this court order, your lender can use the deficiency judgment to place liens on other property that you own, garnish your wages, or freeze your bank accounts. Please see our Debt Collection page for more information on how to protect your exempt property from collection.

WHAT TO DO IF YOU CANNOT PAY THE DEFICIENCY:

If you cannot afford to pay the deficiency and you want to avoid having your wages garnished or your accounts frozen, talk to your lender. See if they are willing to work out a repayment plan with you. Also, you may want to consider filing for bankruptcy. If you qualify for Chapter 7 bankruptcy, it could wipe out the deficiency debt, along with your other unsecured debts. Under a Chapter 13 bankruptcy, you may have to repay just a small portion of the deficiency.

HOW TO AVOID LIABILITY FOR A DEFICIENY:

If you are behind on your mortgage payments and you do not wish to keep your home, you should contact your mortgage servicer to find out if you are eligible for foreclosure alternatives, such as a short sale or deed-in-lieu of foreclosure.

Through a short sale, your lender approves the sale of your home for less than you owe on your mortgage. The difference between the sale price and the total debt amount is the deficiency. You must ask for a deficiency waiver as part of the short sale.

Through a deed-in-lieu of foreclosure, you sign your home over to your lender, and in exchange your lender foregoes foreclosure and releases you from your mortgage. The deficiency amount under a deed-in-lieu of foreclosure is the difference between the fair market value of the property and the total debt.

Whether you pursue a short sale or deed-in-lieu of foreclosure, you should ask your lender to agree in writing to release you from liability for any remaining debt. Please be aware, though, that there may be income tax consequences for cancelled debt. Please see our Tax Liabilitiy of Forgiven Mortgage Debt page for more information.

Deficiency Judgments Brochure

 

Tax Liability of Forgiven Mortgage Debt

Obligation to pay taxes on forgiven mortgage debt

Lenders sometimes cancel or forgive a person’s debt. While this relieves the debtor of an immediate financial stress, it often triggers a tax liability. Under the tax law, canceled debt is considered income to the debtor and is included as part of the debtor’s income. Not only does this impact how much tax is paid, but can reduce deductions that are limited based on adjusted gross income.

Is Cancellation of Debt Income Always Taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.
  • Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
  • Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. The lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
  • Gifts, bequests, devises, and inheritances: You do not have income from canceled debt if the debt is canceled as a gift, bequest, devise, or inheritance.
  • Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applied to most homeowners through December 31, 2013.

INSOLVENCY

How Do I Know If I Was Insolvent?

You are insolvent when your total debts exceed the total fair market value of all of your assets. Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts.

How Should I Report Information Related to Insolvency?

Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent immediately before the cancellation.

Foreclosures and Repossessions:

If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale from which you may realize gain or loss. This is true even if you voluntarily return the property to the lender.

If the outstanding loan balance was more than the FMV of the property and the lender cancels all or part of the remaining loan balance, you also may realize ordinary income from the cancellation of debt. You must report this income on your tax return unless certain exceptions or exclusions apply.

Borrower’s Gain or Loss:

You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale. The gain is the difference between the amount realized and your adjusted basis in the transferred property (amount realized minus adjusted basis). The loss is the difference between your adjusted basis in the transferred property and the amount realized (adjusted basis minus amount realized).

Amount Realized and Ordinary Income on a Recourse Debt:

If you are personally liable for the debt, the amount realized on the foreclosure or repossession includes the smaller of:

    • The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer; or
    • The FMV of the transferred property.

The amount realized also includes any proceeds you received from the foreclosure sale. If the FMV of the transferred property is less than the total outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, the difference is ordinary income from the cancellation of debt. You must report this income on your return unless certain exceptions or exclusions apply.

Bankruptcy:

Debt cancelled in a title 11 bankruptcy case is not included in your income. A title 11 bankruptcy case includes chapters 7,11, and 13, but only if the debtor is under the jurisdiction of the court and the cancellation of the debt is granted by the court or occurs as a result of a plan approved by the court.

How to Report the Bankruptcy Exclusion:

To show that your debt was canceled in a bankruptcy case and is excluded from income, attach Form 982 to your federal attach Form 982 to your federal income tax return and check the box on line 1a. Lines 1b through 1e do not apply to a cancellation that occurs in a title 11 bankruptcy case. Enter the total amount of debt canceled in your title 11 bankruptcy case on line 2. You must also reduce your tax attributes in Part 11 of Form 982.

Qualified Real Property Business Indebtedness:

You can elect to exclude canceled qualified real property business indebtedness from income. Qualified real property business indebtedness is debt (other than qualified farm debt) that meets all of the following conditions:

        • It was incurred or assumed in connection with real property used in a trade or business;
        • It is secured by that real property;
        • It was incurred or assumed before 1993, after 1992 if the debt is either (i) qualified acquisition indebtedness, or (ii) debt incurred to refinance qualified real property business debt incurred or assumed before 1993; and
        • It is debt to which you elect to apply these rules.

Residential rental property generally qualifies as real property used in a trade or business unless you also use the dwelling as a home.

Mortgage Forgiveness Debt Relief Act:

This was passed in December 2007 by Congress. It allowed taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualified for the relief.

This provision applied to debt forgiven in calendar years 2007 through 2013. Up to $2 million of forgiven debt was eligible for this exclusion ($1 million if married filing separately). The exclusion did not apply if the discharge was due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

Hypothetical Examples Regarding the Cancellation of Debt Income:

Example- Insolvency:

A homeowner has a house worth $200,000 but a mortgage debt of $350,000. The owner short sells the home for $200,000 and the bank forgives the remaining debt of $150,000. This forgiven debt is initially treated as taxable income by the IRS.

Now the principles of the insolvency clause can be applied. First, add up all debts and liabilities as well as your assets. The IRS expects you to list the mortgage debt as a liability and the fair market value of the house as an asset. If your total assets amount to $500,000 and your liabilities are $650,000, you have a $150,000 insolvency.

In this scenario, the insolvency amount of $150,000 matches the forgiven mortgage debt of $150,000 which exempts the homeowner from paying taxes on the forgiven debt. Every dollar of the forgiven debt is protected up to the insolvency amount. So if the insolvency in this scenario was $100,000, the homeowner would still pay income tax on the remaining $50,000 of the forgiven debt.

Tax Liability of Forgiven Mortgage Debt Brochure

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