As troubling it is to lose your house to foreclosure, borrowers may still be on the hook for the deficiency amount. It is the difference of what’s owed on the home loan and what the bank could sell for at an auction. “Deficiency judgments” can hurt ex-homeowners years after they have lost their property.
It can be an unexpected surprise for anyone who have sold their house through a short sale where the lender agreed to sell the house for less than the mortgage owed.
Vanessa Corey who achieved a short-sale on her Fredericksburg, VA property in 2008 is a true story. Years after she had completed construction to her home in 2004, tragedy struck leading to a legal divorce with her husband and the emergence of the economic recession, pushed her to sell the property through a short-sale.
As a real estate agent, she thought that the deficiency amount was negotiated away. In other words, she thought that the difference was forgiven by the bank. Last November, she received a letter from her lawyer indicating that she owed her lender $65,000. She was forced into bankruptcy as she had no means of settling the payment.
Many lenders refuse to comment regarding the issue of ‘deficiency judgments’. In the case of Corey’s lender, BT&T clearly indicated that they were pursuing more homeowners with deficiencies.
How Do You Avoid A Deficiency Judgment? It depends on which state the homeowner resides in. Other things include if the borrower has a second mortgage or other liens. It can definitely hurt homeowners if they disregarded the issue altogether.
Mr. Zaretsky, a property lawyer in Palm Beach, Fla said that once your bank has judgment on you, they can pursue you regardless of where you reside. They can demand for your financial records and have your salary taken away or have you jailed if you ignored any contact.
Financial firms can legally impose deficiency judgments in more than thirty states with the inclusion Fla, NY and TX states.
In some states such as California and Arizona, they are both considered ‘non-recourse’ or prohibit ‘deficiency judgments’. The other remaining 10 states that prohibit deficiency judgments are Alaska, Iowa, Montana, North Dakota, Oregon, Pennsylvania, South Carolina, Washington and Wisconsin.
As financial institutions are likely to agree in forgiving the deficiency amount, many ex-homeowners do not know that they are needed to opt for a release. This can be done by having your legal representative demand a release from your financial lender.
Zaretsky advised that ex-homeowners should not pretend that a deficiency judgment may not affect them. He predicts that a large amount of these judgments will be worked on for years to come. The reason is that many of these debt accounts were sold at a lower price to many collection companies and 3rd party investors. These companies have the intended goal of recovering their initial investment.
Banks or collection firms do not act in obtaining judgments right away. As a strategy, they may act patient and allow debtors to financially improve prior to filing with the legal system. For example, banks have up to five years to file in Florida state. Once judgment is obtained, the bank has up to twenty years to pursue the debt with interest.
Regardless of how small the debt is, banks and collection firms can pursue borrowers. Mr. Varno together with his wife sold their Nashville home in 2004 through a short-sale arrangement once he lost his job. 48 months later in 2008, he was pursued by the 2nd lien holder for $25 K. His defended himself by stating that they had released the title and that did not make him liable anymore.
Disappointingly enough, that is far from the truth. Although the title was released, this will not make the debt vanish. As there are differences in state laws, a regular mortgage contract is split into 2 provisions. The first being the collateral exchange where the property is pledged. The 2nd is the contractual guarantee to pay off the loan.
Banks may let go of liens in order to facilitate a short-sale. Doing so does not mean that the banks will also disregard the borrowers’ contractual promise to pay back the debt which are outlined in the promissory documents. Once the property is sold, the secured debt can change into an unsecured debt.
Zaretsky pointed out to one of his customers who went over the mountain when he got a short-sale. He blindly signed away all the papers that his loan agent had given him with the inclusion of a document that made him still legally responsible for the debt.
He was clueless about the fact that the bank could convert the statement into a deficiency judgment through the legal courts.
Banks are not always on your side. Zaretsky mentioned of another customer who was wealthy enough to pay off the difference but the lender didn’t care as they had the power to target you for the debt in the foreseeable future.
Larry Tolchinsky, a Florida real estate attorney said, lenders can occasionally come after borrowers who strategically default (or walk away) if they have other remaining assets.
Lenders will investigate if this was a true strategic default by pulling out your credit report. If they discover that you were not behind in all your payments and not in financial distress, they may pursue you.
If you feel insecure of a probable deficiency judgment, it is highly encouraged to employ a real estate lawyer so as to be certain that there are no remaining deficiencies in the short-sale or deed in lieu agreement.
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