I Got Foreclosed On – Why That’s A Good Thing

Well, I have some interesting news to report. I got foreclosed on. If you know anything about me, I typically pay all my bills on time. My credit score is 750 and so I have excellent credit. Additionally, all my payments are made automatically, so even if I forget them, they are still paid on time. It just so happened that one of my loans were somehow neglected and caused my loan to be foreclosed on. While there are some consequences with having a foreclosed loan, in the end it’s a very good thing for my current financial situation. As explained in my recent Debt Payoff Report, I am going through financial hell right now and through the next six months. So, let me explain what happened and why being foreclosed on was a blessing in disguise.

Roth 401K Loan

Several years ago, I took out a 401K loan to purchase a house. I don’t even remember which house this was. But, I was employed and was able to pay my loan no problem. The monthly payment was about $800 per month.

Unfortunately, in August 2023, I lost my job. I did set up monthly payments automatically, but for some reason, I didn’t make my payments for two months and didn’t realize it. So, I became delinquent for 2 months.

When I realize the delinquency, I tried my best to get back in status. I even came up with the money to pay back what was owed – namely about $1600. However, the administrator of my loan sucks in that they only process payments approximately twice per month. So, even though I paid the money prior to the 60 day mark, it didn’t post until after the 60 day mark. That caused my loan to be foreclosed on. Also, once it’s foreclosed on, it cannot be undone.

The error was mine, but it was still annoying nonetheless.

Consequences

The good news lies in the consequences of being foreclosed on. Although the word foreclosure has a negative connotation to it, it’s not all that bad.

When the bank forecloses on a home loan, that hugely negatively impacts your credit for several years. But that is not the case with a 401K loan.

When I took out the 401K loan, I was essentially borrowing money from myself. The interest payments I was making went back into my 401K loan. I never had to apply for credit, and the fact that my loan was foreclosed does NOT impact my credit score whatsoever. Whew!!!

The only consequences are the tax consequences I have incurred. The 401K administrator will report my earned income to the IRS that I will have to pay taxes on. That amount comes to about $4000!!! This amount is small because I’ve been paying back a 5-year loan for the past 4 years approximately.

More importantly, the distribution that I chose to withdraw amounted to approximately $14000!!! This is HUGE!!!

Blessing In Disguise

The foreclosed loan is a huge blessing in disguise. With the $14000, I can now say that I should be able to pay the debt on my two condos over the course of the next two months.

As a reminder, the mortgage, insurance & HOA fees for my 2 bedroom condo is about $6000 per month. That doesn’t include any other expenses, which I typically have in a given month. The same debt service for my 1-bedroom condo is about $2200 per month, not including any other expenses that I typically incur in a month.

So, with $14000 cash, I will be able to pay for the minimum monthly debt service over the next two months. Additionally, that will give me enough time to save for the minimum monthly payment for the third month. So, hopefully by April, both condos will start to make money again where it will take less and less cash from my personal account for the condos to sustain themselves.

What’s also important to note is that since my loan is now closed, that approximately $800 per month that I was making on the loan goes away! So I can use that to start paying down on my personal debt.

Tax Consequences

I am expecting a HUGE tax bill in April. That’s because I withdrew money from my Roth 401K and Roth IRA this year to purchase my 2-bedroom condo. I am also hoping that the huge losses I’ve incurred from both condos will offset the otherwise huge tax bill I will have. Only time will tell.

But, the important thing about the tax consequences is that they won’t really happen until I file my taxes, which will be about April 15, 2024. So, I won’t have to worry about it until then, and even if I have a huge tax bill, if I don’t have the cash I believe I can go on a payment plan.

For the first time in a while, I can clearly see how I can get through the next six months.

This means that I really don’t have to liquidate any other accounts (maybe a small one here or there), and it also means that I won’t have to touch my Dividend Portfolio!

Final Thoughts

I can’t believe I am thrilled to be foreclosed on. Despite doing everything in my power to prevent that from happening when I discovered that this bill wasn’t being paid, I’m glad things worked out the way it did.

By the way, that $1600 that came out of my account to clear the delinquency will be refunded to me! Haha! It’s still going to be tough over the next six months, but I finally can see a way through this financial storm.

My goal is to absolutely keep my expenses as low as possible on the 2 condos. I’ve incurred A LOT of expenses due to preventative maintenance. I really hope that the preventative measures I’ve taken pays off in the long run. We will see.

If you can’t tell, I am really happy right now.

The one thing I will note is that my available cash in my retirement accounts are really low. At some point in the distant future, I might have to contend with the notion of selling one or more of my real estate properties. For all practical purposes, I am technically retired right now, even though I have not yet reached my retirement age. I am thankful that regardless of how my properties do, I don’t have to worry about food on the table or roof over my head. But, I still have to be prudent in how I spend money.

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