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 property agent, she assumed the lender had agreed to disregard the difference in amount owed after the short-sale. Late last year, her legal representative produced a letter from her lender with a demand to pay an owed amount of $65,000. As she didn’t have the money, she declared bankruptcy.
Numerous banks choose not to make statement about the subject of ‘deficiency judgments’. Corey’s bank, BT&T confessed that they were going after more borrowers with deficiencies.
Are You Protected From A Deficiency Judgment? Whether banks can pursue such a feat depends on several factors including what state the borrower lives in. Other factors include whether there is a second mortgage or other liens involved. It can certainly haunt borrowers if they chose to ignore the possibilities of deficiencies.
According to Richard Zaretsky, a certified real estate attorney in West Palm Beach, Fla, once your lender has a judgment on you, they can come after you irrespective of where you live. They can request for your financial records, have your wages garnished and place you in jail if you fail to respond.
In reference to home foreclosures, lenders can pursue deficiency judgments in more than 30 states. According to the U.S. Foreclosure Network, an organization of mortgage firms, this includes states such as Florida, New York and Texas.
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.
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.
According to Zaretsky, people should not have a false sense of security thinking that a deficiency judgment will not come back and haunt them. He expects many of the deficiency judgments will be filed over the next few years as many of these accounts were sold at discounts to numerous collection agencies and third parties. These organizations would not have bought these accounts if they were not planning on recouping their initial investments.
Judgments don’t have to be obtained immediately by lenders or collection agencies. They may choose to wait until the debtors have financially recovered before they file with a court. In the state of Florida, the lender has up to 5 years to file. Upon receiving judgment, the lender has up to 20 years 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.
Financial institutions may drop the liens to help allow a short-sale. This however does mean that they will terminate the original contractual agreement for the borrower to repay the loan as stated in the promissory notes. After selling the house, the secured debt can evolve 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.
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.
Financial institutions are not very trustworthy or may not be acting on your best interest. Zaretsky explained of a separate borrower who was rich and eligible to pay off the debt. However, the financial institution did not reciprocate as they knew they can later come after him for a deficiency judgment.
Mr. Tolchinsky, a Florida state realtor claimed that financial institutions may pursue borrowers who walk-away if they suspect that they may have other listed assets.
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 you are unsure, it is recommendable to obtain the services of an attorney to make sure that the debt in the short-sale or deed-in-lieu agreement is negotiated away.
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