If you want to take out a loan to buy a timeshare, you’ll probably need to look to the developer. Most major banks and mortgage companies don’t make timeshare loans. Generally, people who borrow money to buy a timeshare are supposed to pay the developer back by making monthly payments for around ten or fifteen years.
Loans to buy deeded timeshares work much like regular real estate loans. In some states, you'll sign a mortgage. In other states, you’ll sign a deed of trust. If you don't make the payments, a deeded timeshare may be foreclosed. (A right-to-use timeshare, however, can be repossessed. Repossession is a different legal procedure than a foreclosure. This article focuses on timeshare foreclosures.)
A timeshare foreclosure is very similar to a residential foreclosure, and you could potentially face some serious consequences.
What Happens If You Default on a Timeshare Loan
The two main categories of timeshares are "deeded" timeshares and "right-to-use" timeshares. With a deeded timeshare, you buy a fraction of the timeshare. You’ll receive a legal deed because your interest is considered real property. (With a right-to-use timeshare, however, you don’t get an ownership interest in the property. You just get the right to use the timeshare, and your interest is legally considered personal property.)
With a deeded timeshare, if you fall behind in payments, you’ll probably get a demand letter demanding that you get caught up on the debt. If you don’t pay up, the developer will probably accelerate the loan, which means calling the entire loan due. If you don’t then pay off the total debt amount, the developer might begin a foreclosure using a judicial or nonjudicial process, depending on state law and the circumstances.
Will a Timeshare Foreclosure Hurt My Credit?
A timeshare foreclosure could damage your credit. Here’s how.
Late Payments Might Hurt Your Credit
Each month that your timeshare payment is delinquent, the developer may report the delinquency to the credit bureaus, which will affect your credit scores. Poor credit scores could cause you problems later on down the road when you try to qualify for a home loan, an auto loan, or another form of credit.
But not all timeshare developers report late payments to the bureaus. So, late or missed payments might not actually hurt your credit scores. However, if the timeshare developer turns the debt over to a collection agency, the agency could report the debt to the credit bureaus, which would lower your scores.
How a Timeshare Foreclosure Might Hurt Your Credit
Much like with late or missed payments, some timeshare lenders and companies don’t report foreclosures to the major credit reporting bureaus (Experian, Equifax, and Transunion). But foreclosures are part of the public record, and credit reporting agencies can see this information.
If you go through a judicial foreclosure, the resulting judgment will be a part of the public record and will likely show up on your credit reports. In a nonjudicial foreclosure, the foreclosure documents are typically recorded in the land records, which are also public records.
When the credit reporting bureaus find out you’ve gone through a foreclosure, they’ll add it to your credit reports, which hurts your credit scores. Also, the foreclosing developer may report the foreclosure to the credit bureaus directly in some cases.
Going Through a Foreclosure Might Hurt Your Chances of Getting Credit in the Future
Having a timeshare foreclosure in your credit history could cause issues when you apply for credit in the future.
When Can I Get a Mortgage Loan After a Timeshare Foreclosure?
Sometimes, but not always, it could take as long as seven years after the foreclosure before you can take out another mortgage loan.
When Can I Get a Credit Card or Car Loan After a Timeshare Foreclosure?
It's hard to say how having a foreclosure in your credit history will affect whether you can get another type of credit, such as an auto loan or credit card. Because a timeshare foreclosure could considerably damage your credit scores, lowering them by as many as 100 points, future creditors might insist you pay a higher interest rate or deny you credit in some situations. In addition, the creditors for your existing credit cards could lower your credit line or close your account.
But the fact that you’ve gone through a foreclosure, which results in a credit denial from one lender, might not stop another one from giving you credit. Certain auto lenders and credit card companies specialize in providing credit to people with bad credit. However, you'll probably get a less favorable interest rate and terms.
You Might Have Issues When Looking for a Job
Some employers run credit checks on prospective employees. So, you might have an issue when applying for some jobs if a foreclosure shows up in your credit reports.
However, some states and cities restrict the use of credit reports when making employment decisions.
Deficiency Judgments and Tax Consequences: Will You Owe Money After a Timeshare Foreclosure?
If a timeshare sells at a foreclosure sale for less than you owe on the loan, the difference is known as a "deficiency."
Example. Suppose Tim takes out a $20,000 loan from a resort developer to buy a timeshare. A few years later, Tim loses his job and stops making payments on the loan. The developer forecloses and sells the timeshare at a foreclosure sale. Tim still owes $17,000 to the developer, but the timeshare sells for $15,000 at the sale. The deficiency is $2,000.
What Is a "Deficiency Judgment" in a Timeshare Foreclosure?
In some states, the foreclosing developer can get a deficiency judgment (a personal judgment) against the borrower for the amount of deficiency. In other states, like Florida, state law prohibits a deficiency judgment after a timeshare foreclosure.
To get information about your particular situation, talk to an attorney.
What Are the Tax Consequences After a Timeshare Foreclosure?
If the developer writes off the deficiency, you could receive a 1099-C Cancellation of Debt form from the IRS. You might have to include the canceled amount in your taxable income unless you qualify for an exclusion or an exception.
If you want to learn more about possible tax consequences after a timeshare foreclosure, consider talking to a tax attorney.
Getting More Help
Timeshare foreclosure procedures and laws vary from state to state. If you're behind on your timeshare payments, or if your timeshare is in foreclosure, consider talking to a local foreclosure attorney to learn about your rights and options.