A deficiency judgment allows a lender to collect money from the former homeowner after a foreclosure that doesn't bring enough to cover the loan. For example, if your mortgage is $50,000, and the house sells for $35,000, this means the lender could seek the $15,000 from you through the court. Here are some tips to help you avoid a deficiency judgment.
Check Judgment Deficiency Laws
Some states have enacted anti-deficiency laws, which prohibit lenders from filing deficiency judgments. Other states allow deficiency judgments, but set restrictions. For example, Arizona does not allow deficiency judgments on single-family or two-family properties with less than 2.5 acres, provided the borrower doesn't commit waste to lower property value.
Several states, such as Utah, restrict the amount of judgment based on fair market value and the mortgage owed. For example, if your home has a fair market value of $25,000, you owe $35,000, and the house sells for $20,000, you would only be liable for $5,000. Anti-deficiency laws do not protect second mortgages, second residences not a primary home, and home equity loans.
Agree to a Consent Foreclosure or Deed-in-Lieu of Foreclosure
In a consent foreclosure, you agree to an abbreviated foreclosure, and the lender files a motion in court stating you cannot contest the foreclosure. The lender receives the house title, but they waive their right to seek deficiency judgments.
Another option to avoid a deficiency judgment is a deed-in-lieu of foreclosure. A deed-in-lieu of foreclosure relieves you of the foreclosure process altogether, and gives the house back to the lender, meaning they forgo the right to pursue a deficiency judgment.
Take the Risk of a Lender not Pursuing the Deficiency Judgment
A lender can't collect the deficient amount without a lawsuit. Many lenders won't take legal action, since it is expensive, and if you don't have sufficient assets to pay the deficient amount, the chance isn't high they will seek a judgment. However, if you have sufficient assets or income, the lender may decide to pursue the deficiency judgment.
File for Bankruptcy
Chapter 7 bankruptcy completely removes unsecured debts, and it enables an Automatic Stay, which prohibits debtors from pursuing the debt further. However, you must pass a Means Test to qualify for Chapter 7.
The Chapter 7 Means Test determines if your income is sufficient to pay the debt. Otherwise, you will have to file for Chapter 13 bankruptcy, which allows you to pay off the debt gradually. Bankruptcy may not be the best option unless you have multiple debts you can't pay.
The chance is small a lender will seek deficiency judgments, but it doesn't hurt to be prepared. If your home has been foreclosed and faced with a decency judgment, contact a real estate lawyer like Iannello Anderson to discuss options.