With the huge increase in both foreclosures and short sales, more mortgage lenders are beginning to exercise their rights to sue defaulted borrowers for a deficiency judgment. If a judgment is granted the borrower becomes legally liable for the debt they still owe. This represents the outstanding amount which is comprised of the difference between the monies raised through the sale of their defaulted property, and the amount which the borrower agreed to pay back when they signed the original promissory note. In addition this shortfall sum will include the banks legal fees, foreclosure costs and interest on the debt.
Every state has its own laws pertaining to deficiency judgments, and even though some states are non recourse states, effectively protecting the borrower from further action after a foreclosure, most states allow deficiency judgments for second mortgages. It could well be the case that several years pass after the foreclosure before a borrower even receives notification that they are being sued for a deficiency judgment.
Any borrower who receives notification that they are being sued should consider taking specialist legal advice. Once a judgment is obtained the borrower is legally bound to pay it, and the lender may pursue the debt for up to twenty years, depending on state rules.
Lenders may prefer to wait until a defaulted borrower’s financial situation has improved before suing, but in the case of strategic defaulters there may be assets which the lender can pursue earlier. All non exempt assets can be used towards the debt, and lenders can have bank accounts frozen and wages garnisheed in order to recover the outstanding debt. Anyone who receives a deficiency judgment should not ignore it.
Borrowers who have had their homes foreclosed should familiarize themselves with their states statutes regarding deficiency judgments to ascertain if it is something they should prepare themselves for. It is more likely that borrowers will be sued if they are known to have assets.
Mortgage lenders may choose to sell the debt on to collections agencies who will then contact borrowers regarding the debt. As agencies will have purchased the debt for a lower than actual value, yet demand the full amount of the debt, it should be possible to negotiate a settlement figure of less the actual debt.
The options which borrowers have if they do receive a deficiency judgment are to pay the outstanding debt; negotiate a settlement figure to pay; arrange to repay the debt in instalments; or file for Chapter 7 bankruptcy. The latter option will remain on their credit report for ten years and can have a serious negative effect on future ability to obtain credit.
If the amount of the debt is high it is advisable to seek specialist legal advice regarding the deficiency judgment, and perhaps make use of a professional debt negotiator to reach an agreed settlement figure. It is predicted that there will be far more deficiency judgments sought by lenders, particularly with the marked increase of borrowers opting to strategically default and simply walk away from their mortgage obligations.