Foreclosure is often misunderstood by consumers. If you’re in default on a secured loan, the lender can initiate a process resulting in the forced sale of your property to cover the debt. But this doesn’t always cover the balance owed in full. As the debtor, you must then make up the difference; the lender may obtain a deficiency judgment from the court to recover the remaining debt.
A deficiency is a loss a lender takes on when it can’t sell a foreclosed home at a price high enough to cover what you owe them.
How Does a Deficiency Judgement Work?
In states where this process is permitted, the judgment can apply to any secured loan when a home, car, etc. is seized from a defaulting debtor. A home mortgage is usually based on the appraised value of the property. This is designed to avoid a deficiency and requires borrowers to make a down payment, so less money is at risk.
With these safeguards, the lender can recoup any amounts owed if the borrower defaults. But this works just in theory. Home values can change with economic conditions. During downturns, a home’s value can drop, resulting in an underwater mortgage. Even where deficiency judgments are allowed, the lender must prove through comparable home listings and professional appraisal that it received a fair price from selling the home. This also prevents banks from accepting low offers and pursuing borrowers for the remaining balance.
Is a Deficiency Judgement Automatic?
No, the lender must file a motion with the court to request one. Otherwise, the court will accept the money obtained from the property sale. The lender must file a lawsuit and the court granted the judgment, giving the lender the legal right to pursue the money you owe. Whether the lender takes this route depends on how much you owe and whether engaging in such a prolonged and expensive legal fight is worthwhile.
You can fight a deficiency judgment. To do this, you’d need your own legal counsel. While it all depends on how much you owe, it often makes more sense to pay your debt than to incur the cost of legal action. If the lender succeeds in getting a judgment against you, it can:
- Put a lien on other property you own
- Garnish your wages
- Deduct money from your bank account
What Is an Anti-Deficiency Statute?
States that don’t allow lenders to pursue collateral for a mortgage, known as “non-recourse” states, have an anti-deficiency statute (Alaska, California, Oregon, Washington, Minnesota, and Montana). They’re not allowed to go after personal assets if the mortgage isn’t fully satisfied after a foreclosure sale. In some states, anti-deficiency legislation applies only to seller-financed or “purchase-money” mortgages.
California, for example, does not impose liability on borrowers for the deficiency of purchase-money loans in a non-judicial foreclosure. You may also not be liable for deficiency in a judicial foreclosure. This applies to foreclosures involving seller-financed loans, properties with four units or less, or refinances on purchase-money mortgages executed after January 1, 2013. Nonetheless, lender and borrowers’ rights vary from state to state.
What Can I Do If a Lender Obtains a Deficiency Judgement?
The judgment will remain on your credit report for seven years. It will also reduce your credit score that’s also been hit by the foreclosure process. The amount of time a lender has to collect debt on a judgment varies by state, which is typically a number of years.
Your options for protecting yourself include negotiating with the lender. You might be able to arrange another repayment method if the lender agrees. Challenging the judgment in court is another option. Or, you can file for personal bankruptcy. While this can stop collections actions, it can have a range of consequences, so it’s important to weigh the pro’s and con’s before going this route.
Meet with Our Los Angeles Foreclosure Attorney
Our team is equipped and experienced to help defend you and your home against foreclosure. By analyzing your situation and finances, our team will advise you on the best path to financial freedom, such as bankruptcy or a short sale. Tens of thousands of homes may be in foreclosure at any time and we have extensive experience in helping homeowners navigate the process. Oftentimes, we can prevent a lawsuit, provide relief from crushing debt, and even stop the foreclosure process. To get started, request a free evaluation or call 888-348-2609 today.