Foreclosure: You're Not Necessarily Off The Hook;
Deficiency Judgments Cause Big Problems
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
As if a home foreclosure weren’t enough of a problem, many homeowners are learning a new term: deficiency judgment.
When a lender forecloses on your home, it tries to sell your home at auction to pay off the balance on your mortgage. This sale is often called a trustee’s sale. But when the real estate market is depressed, the bank may not get enough money to pay your mortgage in full.
So how does the bank get the remaining foreclosure balance?
It comes after you — the previous homeowner — to make up the difference, known as the deficiency. With a little legal maneuvering, the bank turns the deficiency into a deficiency judgment and then chases you for payment.
Many homeowners today are forced, by their financial situation, to sell their home for less than the mortgage balance. This is known as selling short. And just like the lender who sells a home at a foreclosure auction, when you sell the home privately in a short sale, the balance on the mortgage that remains unpaid is the deficiency you must pay. This deficiency becomes a deficiency judgment against you, and, as with a foreclosure, the lender pursues you for the remaining amount.
In today’s market, banks find it profitable to go after previous homeowners for deficiency judgments, especially when a credit check reveals that the homeowner is not behind in bills other than his mortgage payment. This alerts the bank that the homeowner is planning to walk away from the home, so the bank pursues the homeowner, garnishes his wages, and seizes other assets to pay the deficiency.
What’s more, lenders are not pursuing only large deficiencies. In many cases, they will come after a borrower, for example, when only $20,000 is due.
Lenders are not the only collectors after you to pay a deficiency judgment. Since banks sell delinquent accounts to collection agencies and other third parties, a collection agency you’ve had no contact with may demand that you pay a judgment that the agency purchased from with your mortgage lender.
And as if that’s not enough, you may be surprised when the lender or collection agency tries to enforce the judgment against you after a period of years. If they discover that you have no assets at the time of the sale, they simply wait awhile until you accumulate assets and then seize those to satisfy your deficiency judgment from many years earlier.
Yet another distinction catches homeowners by surprise: A mortgage loan on their home is secured in two ways: By the home, which serves as collateral, and by your promise to pay, which is a personal debt.
This means that even if your lender consents to a short sale, the lender may not release you from your personal promise to pay. So after your home sells, your personal promise to pay remains in force.
You can prevent problems from a deficiency judgment by
— reading all document closely. If your lender has agreed to a short sale, you might find somewhere in the fine print, buried under the mountain of mortgage paperwork, a “confession.” If you sign this confession, you are agreeing that you will still owe the deficiency even after your home is sold.
— getting a release from your lender. Make sure the release says you have no future mortgage liability. This should be part of your negotiation.
— consulting with a bankruptcy lawyer. Bankruptcy often gives you the cleanest way to separate completely from all further obligations to your lender.
Please feel free to call me with your questions. Lenders have hundreds of lawyers working for them. Your best bet may be to have an experienced lawyer working for you.