A timeshare foreclosure is much like a residential foreclosure in that you could potentially face certain serious consequences as a result of the foreclosure. Read on to learn more about what might happen to your credit score, taxes, employment opportunities, and ability to obtain future loans if you go through a timeshare foreclosure. (Learn more about foreclosure in Nolo's Foreclosure topic area. For articles specific to the foreclosure of timeshares, see Nolo's Timeshare Foreclosures topic area.)
A timeshare is a form of shared property ownership. With a timeshare, multiple owners get to use the property for a specified period each year.
If you take out a loan to purchase an interest in a timeshare and fail to make your timeshare mortgage payments or keep up with the assessments, you will likely face foreclosure. (In addition to monthly mortgage payments, timeshare owners are ordinarily responsible for maintenance fees, special assessments, utilities, and taxes, collectively referred to as “assessments.” Find out more in Nolo’s article Can a Timeshare Be Foreclosed for Nonpayment of Fees or Assessments?)
Timeshare foreclosures might result in quite a few negative consequences for former owners.
When you apply for a loan, one of the first things a potential lender takes into consideration when deciding whether to lend to you is your credit score, often your FICO score. (FICO stands for Fair Isaac Corporation, the creators of the FICO score). A timeshare foreclosure might be extremely 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 does not 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. However, if you already have a low credit score, there is less of an impact. Learn more in Nolo's Credit Scores article.
A timeshare foreclosure might create problems when it comes to future credit due to the poor credit rating resulting from the process.
Getting a mortgage loan after a timeshare foreclosure. In some cases, it be as much 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 is very difficult to forecast how a foreclosure will affect the availability or cost of obtaining other forms of credit, such as a car loan or credit card. Because a timeshare foreclosure might substantially lower your credit score, this can result in a higher rate of interest than the prevailing market rates and can also result in you being denied credit in some circumstances. In addition, credit card companies for your existing cards may 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 may not preclude you from obtaining credit from another lender. In fact, there are some car loan and credit card companies that specifically target individuals with poor credit histories, though you’ll probably be subject to a high rate of interest and the terms could be less than favorable.
(To learn more about credit and how to improve it after negative events such as foreclosure, visit our Credit Repair topic area.)
Following a timeshare foreclosure, you could face a deficiency judgment—though most timeshare lenders only go after the property. Still, your case may be the exception.
What's a deficiency judgment? When a lender forecloses on a mortgage, the total debt owed by the borrowers to the lender can exceed the foreclosure sale price. The difference between the sale price and the total debt is called a deficiency.
Example. Say the total debt owed for a timeshare is $15,000, but it only sells for $10,000 at the foreclosure sale. The deficiency is $5,000.
State law sometimes prohibits a deficiency judgment. Whether or not 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 is not 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)). (To learn more about deficiency judgments in the foreclosure context, see our Deficiency Judgments After Foreclosure area.)
Tax implications. If the lender decides to write off the deficiency balance instead and sends you a 1099-C Cancellation of Debt form to the IRS, you must include this amount into your taxable income for the next year. (The Mortgage Forgiveness Act of 2007 only applies to principal residences, not timeshares. Learn more in Nolo’s article Canceled Mortgage Debt: What Happens at Tax Time?)
(To learn more see Nolo’s After the Foreclosure: Deficiency Judgments and Taxes area.)
It is now common for employers to run a credit report on potential employees. Because a foreclosure may appear on your credit report, you might have a hard time getting certain jobs. This, of course, depends on the employer and, to some extent, the reason for the foreclosure.
For example, if you are applying for a position in advertising and can show extenuating circumstances (such as you had serious medical issues that led to the default), the potential employer will probably take that into consideration when contemplating hiring you. However, if you are 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 may 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 cannot 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.
(Learn more in Don't Use a Credit Repair Clinic.)
To learn about alternatives to timeshare foreclosure, see our article Options to Avoid a Timeshare Foreclosure.