As discouraging it is to lose your place to foreclosure, borrowers may still be liable for the deficiency amount. It's the difference of what's owed on the house loan and what the bank could sell for at an auction. "Deficiency judgments" can come after ex-borrowers at any unexpected time-frame after they have lost their house.
It can happen to homeowners who have achieved short-sales where the bank had approved selling the home for less than what it was worth.
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 realtor, she believed that the difference in the amount owed in the loan was forgiven by the lender. Last Nov, she obtained a letter through her attorney showing that she owed the bank $65 k. She had no choice but to file for bankruptcy as she could not afford to pay the bank.
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.
Can My Lender Come After Me For A Deficiency Judgment?
The possibility relies on location or state where the ex-homeowner lives and including whether he or she has a 2nd mortgage or other liens in the picture. It can come after ex-homeowners if they don't consider the warnings seriously.
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.
Luckily they do not allow 'deficiency judgments' in California and Arizona. Other states that prohibit these judgments include Wisconsin, South Carolina, Washington, Pennsylvania, Oregon, N. Dakota, Alaska, Iowa and Montana.
Although lenders are willing to forgive the deficiency amount, many borrowers are not aware that they are required to request for a release. To avoid any unforeseen surprises, ensure that your attorney requests the bank to release you of any future obligations.
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.
Financial institutions or debt collection companies may sit and wait for borrowers to cure themselves from their financial woes before filing for a judgment. Take for instance in Florida state, financial institutions and debt collection companies can wait up to five years to file. Once judgment is received, the organizations will be granted a time span of up to 2 decades to collect 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 claimed that one of his clients' who was so excited in obtaining a short-sale, carelessly signed all the documents that his real estate agent provided him including a confession that clearly made him still legally liable for the debt.
According to Zaretsky, he had no idea what was going on. The lender could go to court and convert the confession into a deficiency judgment.
Lenders can also be unreliable. Zaretsky had another client who was willing and financially able to pay off the deficiency but the bank did not bother asking as they reserve the right to pursue the deficiency judgment at a later point.
Property agent Mr. Tolchinsky from Florida, mentioned that banks can sometimes pursue borrowers who abandon their home with the knowledge that they may have money or other assets they can pursue.
Financial institutions may conduct due diligence to see if the home was abandoned due to real reasons of the borrowers' financial hardship. It this was not the case, the financial institution will come after the borrower for the remaining debt.
If in doubt, it is advisable to seek legal advice to ensure that your short-sale or deed in lieu agreement does not contain any deficiencies therefore allowing your lender to pursue you in the future. To alleviate any risks, it is important for your attorney or counselor to negotiate the deficiency out of the short-sale or deed in lieu contract.
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