After your lender forecloses on you, do you still have a financial obligation? The short answer for most people is probably yes! For most former homeowners, their lender have the option to file for a "deficiency judgment", that is the difference between what the former homeowner owed on their mortgage and what the bank could sell it for at auction minus costs. These deficiency judgments are ticking time bombs that can explode years after the borrowers lose their homes.
This is an area of law that is strongly influenced by state law. Some states, such as California, are “non-recourse” and don’t allow deficiency judgments. But, even there, if the if the original loan was refinanced, some or all of it may be subject to claims. In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas.
Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank. But even when lenders are willing, many borrowers may not be aware that they have to ask for release. So, if you are pursuing a short sale, be sure your lender releases you from any further obligation.
Because of falling home prices, borrowers who always paid their mortgage but who have run into unforeseen circumstances — like unemployment or a job transfer — can no longer sell their homes for what they owe. As a result, they are being forced to short sell or foreclose and are getting caught up in deficiency judgments.
Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there’s a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them. Once the banks have a judgment, they can pursue you anywhere. They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail. There is every reason to believe that many will be filed over the next few years, based on the fact that banks have sold many of these accounts to collection agencies and other third parties, at discount. The parties who bought those notes wouldn’t have paid money for them unless they had the intention of acting.
What can be scary is that the judgments don’t have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.
Sometimes lenders go after borrowers walking away from their homes if they have other assets. Banks will sometimes pull the borrowers credit reports to see if it’s a strategic default. If you’re behind on all your other payments, you’re okay. But if you’re not, they’ll come after you.
In summery almost anything is preferable to a foreclosure where the borrower is completely at risk to what the bank may decide to do at some time in the future. A properly negotiated short sale will let you know what your future financial responsibility will be. In most cases it can be negotiated away.
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