Deficiency judgments? Never heard of them. I hope you never do.
Just when you think the banks can't do anything else to make your life miserable, they do. When it comes to banks and money, what you don't know can reach up and bite you.
Foreclosed homeowners may still be on the hook for the difference between what they owed on their mortgage loan and what the bank received for the property at auction.
Your mortgage consists of two parts: a promissory note and collateral. Just because the bank has taken back the real property and even sold it does not necessarily get rid of the promise to repay the loan.
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First, just what is a deficiency judgment?
When a bank forecloses on your home, and sells the property for less than what is owed, they have the option of seeking a monetary judgment for the difference.
About 30 states including Texas, Florida, and New York, allow for lenders to seek deficiency judgments. Other "non-recourse" states like California only allow banks to recover the proceeds from the sale.
Other factors include whether or not the mortgage has been refinanced, the existence of second mortgages, and your own state's particular laws and consumer protections.
Warning: If you are in foreclosure, do not sign any real estate paperwork without your own legal counsel.
Banks are not your friend. In that 3 inch pile of documents could be an admission on your part that you still owe money. You can be hit for the difference even in short sales or after giving a deed-in-lieu of.
Financial institutions are resorting to more and more deficiency judgments as foreclosures rise, especially if they suspect a strategic default (homeowner is paying other creditors but not the mortgage holder).
The lender may also have sold the judgment at a discount to a collection agency who will hound you into eternity.
Protect yourself.
In Florida, banks have 5 years to obtain a judgment, and 20 years to mess with your credit and attempt to collect. With interest.
The Silver Bullet:
Most financial advisors warn you not to file for bankruptcy unless absolutely necessary. Baloney.
Speak to a competent bankruptcy attorney before agreeing to any short sale or enduring foreclosure proceedings and eviction from your home.
Bankruptcy is a powerful consumer tool that prevent deficiency judgments. You might even receive free use of your foreclosed home a while longer before being forced to vacate the premises.
Caveat: As always, consult an attorney in your state to see how you state laws affect your individual situation.
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