The unofficial definition of a deficiency judgment, sometimes called a mortgage deficiency judgment, could be something like: “…When your former mortgage lender won’t let you go.” Unfortunately, the real answer is a little more complicated.
If the unthinkable happens and you lose your home to foreclosure sale, there could be two outcomes. The first outcome is that the lender receives the amount of money you owe on the mortgage. In a perfect world, your house is worth $100,000 and it sells at foreclosure auction for at least $100,000, then your mortgage lender is just a bad memory (maybe).
A True Deficiency Judgment
The second outcome is that if your property is worth $100,000 but sells for $50,000. The $50,000 difference is called a deficiency, not a deficiency judgment. A deficiency is the difference between the amount you owed on your mortgage and what your lender sold it for at auction. In other words, you don’t own the house anymore, but you still owe the lender money it couldn’t recoup to satisfy your debt.
A deficiency isn’t just in cases where the house is foreclosed on and sold at auction. It could also happen if your lender approves a short sale. In a short sale, a lender agrees to release the lien on your home in exchange for selling the house (even at a discounted price). If the short sale leaves any deficiency, you can still owe the remaining balance.
Even if your house is sold or auctioned off for the exact amount you owe, your lender could still claim you’re deficient. The lender may want to bill you for the costs associated with the foreclosure process.
You may not be surprised to find that a lender will want back all the money you owe even if they took your home! To collect the remaining balance, your bank will go to court and sue you for the outstanding amount. If the lender wins, you will be personally liable for the unpaid debt. This is called a deficiency judgment.
Possible Actions Taken Against You
Having this type of judgment against you is just like any other court-ordered judgment, such as when a credit card company or business sues you. You are personally liable for the judgment amount and are legally required to pay the money. If you don’t, the lender has several legal options to go after you. For instance, it can:
- Garnish your wages
- Garnish your bank and checking accounts
- Judgment lien against your personal property
A Ticking Time Bomb
Your lender can keep its options open when it comes to a deficiency. They can wait until you are financially back on your feet in order to collect. In Florida, for instance, a lender has five years to file a lawsuit and obtain a Florida deficiency judgment. If you lost your house and the lender waits five years to sue, you'll owe five years plus interest! Then, your bank has about 20 years to collect the money from you.
How to Avoid a Deficiency Judgment
There are strategic ways to avoid this type of judgment. With a short sale, your lawyer can negotiate a deficiency judgment waiver. If the lender agrees, then your lawyer needs to make sure the provision is included in the short sale agreement. You, or a foreclosure defense attorney can also try to negotiate a settlement with the lender for a lesser amount than the deficiency.
With a foreclosure deficiency judgment, you could file for bankruptcy. A Chapter 7 bankruptcy would discharge the deficiency. A Chapter 13 bankruptcy would allow you to repay the deficiency judgment over time.
You could agree to a consent foreclosure. This is where you agree to allow for an abbreviated foreclosure. Your foreclosure lawyer should make certain that your lender waives its right to pursue a deficiency judgment. Your lawyer can also negotiate a deed-in-lieu of foreclosure for you, in which you give the house back to the bank instead of them taking it from you in foreclosure. Be careful though! Your attorney MUST review the deed-in-lieu agreement, and sometimes force your lender to include a waiver of the deficiency.
The best option you have, if you’re still in the foreclosure process, is to fight the foreclosure. You can hire a lawyer to help you obtain a loan modification or engage in foreclosure defense. A select few law firms in the nation offer both services, which greatly increases your chance of keeping your home.