By: Lance T. Denha, Esq.
If your lender successfully wins a deficiency judgment against you then you are personally liable for the amount of that judgment. In fact, failing to pay that deficiency judgment permits the lender to pursue you. Some tools for collection that a lender can utilize can include garnishing wages, levying bank accounts or repossessing personal items (not necessarily your home, car, or other essential items). Retirement accounts are generally not at risk in a deficiency judgment, but you should still check with a local attorney to be certain as state laws differ.
Lenders differ in whether they will pursue a deficiency. Some do and others avoid doing so for a variety of reasons. In many instances, a lender will not go to the trouble. Legal action is expensive and time consuming, and people who just suffered a foreclosure often don’t have the assets or income needed to satisfy a deficiency judgment. After all, as the thinking goes, if you had the resources, you wouldn’t have missed your payments in the first place. However, not all creditors are that willing to move on. Some will pursue and for those that do pursue they must first factor in the following in order to ascertain whether it makes sense to “begin the chase” by considering each of the following listed below.
First, does their state law allow deficiency judgments after foreclosure? If state law doesn’t permit it then a creditor is unlikely to pursue a deficiency action. If yes, other factors will have to be met before collection efforts can resume.
Second, if state law allows a deficiency judgment, was there actually a deficiency at the sheriff sale? A deficiency is when the house sells for less than what the borrowers owe on it. If they owe $140,000 and the property is auctioned for $130,000, there is a $10,000 deficiency. Unfortunately, due to rapidly declining home values, many foreclosure auctions end with a deficiency.
Third, what is the fair market value of the home? Many courts will allow a deficiency judgment only for up to the actual value of the house. Hence if the house sold at a foreclosure sale for $200,000 and the homeowners owed $275,000 but the fair market value is $225,000 courts may limit the deficiency to a maximum of $25,000.
Fourth, if state law allows a deficiency and that deficiency would yield an amount greater than the fair market value of the home, does a lender still have an incentive to pursue a judgment? Because of fees and costs, many lenders will not pursue with a deficiency judgment initially. However, a creditor can keep the judgment in their pocket for years to come and may continue checking the status of that homeowner’s financial situation in order to gauge whether to move forward on such judgment at anytime during the holding of that judgment. Hence, it’s always better to settle if possible.
Finally, when examining the possibility of a wage garnishment for a debt after foreclosure, creditors understand that debtors may have the right to discharge such deficiency judgments through the filing of a bankruptcy. If the bank gets a judgment against borrowers and tries to garnish wages, the former owners can file a Chapter 7 and have it eliminated, if they meet the other requirements for a Chapter 7 bankruptcy. So even in the worst case scenario, homeowners might be able to avoid wage garnishment by filing a bankruptcy. Alternatively, if bankruptcy is not an option then a debtor may have the ability to request Installment Payments through the court. This evidences good faith on the part of the debtor and allows both the creditor and debtor to attempt to work something out to avoid the pursuit of a judgment of collection as the creditor is satisfied they are receiving a monthly recurring payment from the debtor.
As always it is highly advisable to consult with a legal professional skilled in this area of law as a skilled attorney can be highly creative in negotiating payments to avoid harassment and the attachment of your wages and personal belongings.