Many Americans dream of buying and owning a vacation timeshare. But major banks and mortgage companies don't usually offer timeshare loans. So, people often take out a mortgage from the resort developer to buy their timeshare. But what happens when you can no longer make your timeshare loan payments?
If you take out a loan to purchase an interest in a timeshare and fail to make your timeshare mortgage payments—or you don't keep up with the assessments—you'll likely face a foreclosure. A timeshare foreclosure, much like a residential foreclosure, could potentially result in serious consequences, like a lower credit score, a deficiency judgment, or tax ramifications.
When you apply for a loan or other form of credit, one of the first things a potential lender takes into consideration when deciding whether to lend to you is your credit score. A timeshare foreclosure might be damaging to your credit score. Keep in mind, though, that not all timeshare lenders and companies report late or missed payments—or even foreclosure—to credit agencies on time, if ever. But this doesn't mean that the timeshare foreclosure will never get reported or show up on your credit report. Foreclosures are part of the public record, and credit reporting bureaus have access to this information.
Generally, if you go through a foreclosure, your credit score will drop 100 points or more, though the actual drop in credit score can vary from one borrower to the next. The past-due entries for missing your payments, assuming that the lender who loaned you money to buy the timeshare reports them, will also drop your score. The hit is more severe if you had a very high credit score before the foreclosure action. But if you already have a low credit score, there's less of an impact.
A timeshare foreclosure might create problems for you when it comes to getting credit in the future.
Getting a mortgage loan after a timeshare foreclosure. In some cases, though not all, it could take as many as seven years from the completion date of the foreclosure before you can get another mortgage.
Getting a credit card or car loan after a timeshare foreclosure. It's difficult to forecast how a foreclosure will affect the availability or cost of obtaining other forms of credit, like a car loan or credit card. Because a timeshare foreclosure might substantially lower your credit score, this can result in a higher interest rate than the prevailing market rates and can also result in you being denied credit in some circumstances. Also, credit card companies for your existing cards might cut your credit line or close your account.
Not all lenders look at a bad credit score in the same way. A notation on your credit report that will result in a credit denial from one lender might not preclude you from obtaining credit from another. In fact, some car loan and credit card companies specifically target individuals with poor credit histories. But you'll probably be subject to a high interest rate, and the terms could be less than favorable.
Following a timeshare foreclosure, you could face a deficiency judgment—though most timeshare lenders only go after the property. Still, your case might be the exception.
What is a deficiency judgment? In a foreclosure, the borrower's total debt sometimes exceeds the foreclosure sale price. The difference between the sale price and the total debt is called a "deficiency." For example, say the total debt owed for a timeshare is $15,000, but the foreclosure sale brings only $10,000. The deficiency is $5,000. Some states allow the foreclosing bank to seek a personal judgment, which is called a "deficiency judgment," against the borrower for this amount.
State law sometimes prohibits a deficiency judgment. Whether you'll face a deficiency judgment after a timeshare foreclosure depends on state law and whether the lender decides to go after you for one. In Florida, for instance, the borrower isn't subject to a deficiency judgment after a timeshare foreclosure even if the proceeds from the sale of the timeshare are insufficient to cover the debt. (Fla. Stat. Ann. §721.81(7)).
Tax implications. If the lender decides to write off the deficiency balance instead and sends you a 1099-C, "Cancellation of Debt" form, you might have to include this amount in your taxable income, unless you qualify for an exception or exclusion.
Employers sometimes run a credit check on potential employees. Though, some states (and cities) restrict the use of credit reports in employment decisions. (To find out whether your state is among them, go to the National Conference of State Legislatures' chart on www.ncsl.org.)
Because a foreclosure might appear on your credit report, you could have difficulty getting certain jobs. This, of course, depends on the employer and, to some extent, the reason for the foreclosure. For example, if you're applying for a job in the financial services or banking industry, a bad credit report might affect your ability to get the job because the potential employer might think that you're not able to competently handle finances.
Companies that claim that they can repair your credit following a foreclosure are almost always a scam. You can't legally remove accurate information from your credit report, and companies that claim they can do this are dishonest. In many instances, credit repair companies simply write a letter to credit report agencies disputing errors and outdated information, which is something you can easily do yourself.
If you're facing a timeshare foreclosure, consider talking to a local foreclosure lawyer to learn about your rights and different options. A lawyer can advise you about ways to potentially keep or dispose of the timeshare or ways to improve your credit after a foreclosure. If you have questions about possible tax consequences following a timeshare foreclosure, consider talking to a tax attorney.