Update 2-18-2012: Freddie Mac has decided to prohibit loan servicers from going after borrowers under deficiency judgments under certain short sale or deed-in-lieu of foreclosure actions.
For those who mail house keys back to the lender or have a hardship and have to lose the house, or even sell the home for less than the total mortgage amount, do you think filing for bankruptcy will allow you to settle the debt and move forward and start over? —Well, not so fast…Get ready to pay later and be hounded for years.
As part of your Security Deed (Mortgage), you agree to pay back the loan. If for some reason you can’t pay it back, and you have to give up your home (short sale, deed in lieu of foreclosure, or foreclosure) the debt doesn’t just disappear. The lender/loan servicer may file what is called a Deficiency Judgment. It is a court order against borrowers ordering them to make up the difference between the gross amount they receive from the liquidation of the property (minus) the debt (loan balance plus legitimate loan expenditures/losses/legal costs). If there is an overage, you should be clear. If there is a shortage (negative equity), you are on the hook for the shortage.
The deficiency judgment may be filed anytime for up to 5 years after you get rid of the property and they may be able to collect on that debt up to 20 years after they file the judgment. To further agitate you, this Deficiency Judgment may be deemed a “benefit” to you by loan forgiveness and is normally taxable income. However, I believe that the US Congress eliminated this “forgiveness of debt” on a real property and will not taxable again this year.
Also, I do believe that regardless of whether or not you file bankruptcy, the debt can still be held against you.
For example, I know a woman over 60 who lost her job, couldn’t afford to make payments on her mortgage, and she filed for Chapter 7 bankruptcy with an attorney who told her the house was protected under the bankruptcy settlement. However, she showed me the paperwork of the bankruptcy settlement and it excluded Deficiency Judgments from the bankruptcy filing. Since that was her whole point of filing bankruptcy, and not having the assets to cover the mortgage payoff, she wonders why she filed for bankruptcy at all since that was her goal – to cover what she could and have the debt relief. I suggested she confirm this with her bankruptcy attorney and GET IT IN WRITING from the attorney.
I had heard that the bankruptcy laws were essentially rewritten a few years ago to make it more difficult to completely discharge your debts, but since I am not aware of the criteria and protections, I am not sure where it all stands. Your credit score will take a hit but after paying on time for 12 months straight, your credit score returns to a much more respectful rating….
In Georgia, the court has to confirm with the lender within 30 days after sale that the sale was made at market value and there is no right of redemption by the Borrower. See the Richmond Federal Reserve Bank Study of the different US States’ Laws on Deficiency Judgments.
Does anyone have any more knowledge of these deficiency judgments to shed some light on this unfortunate subject?