Credit Coaching – What About the Foreclosure Debt?

The words “deficiency judgment” rate among those that no homeowner ever wants to hear. These words mean that they are in serious risk of losing their home to foreclosure. They homeowner will fret about paying the deficiency to the mortgage holder, as well as the chance that their mortgage lender will try to recoup their losses by going after their other assets.

Usually a homeowner is not sued for a deficiency judgment after they have lost their home to foreclosure. But because the credit and finance industry is so complex, it is often difficult for those homeowners to understand how mortgages really work and what happens with all the aspects of a foreclosure, including the debt.

A deficiency judgment is an amount of money which is the difference between the total amount of your mortgage loan less the money made by the lender by selling your home at a foreclosure sale. Every state has different laws which cover the use of deficiency judgments. You can find out whether yours is a state which allows deficiency judgments by checking with the appropriate authorities in your area. If deficiency judgments are not done in your state, then you can breathe a little easier – your wages will not be garnished or your assets repossessed.

However, what happens if a deficiency judgment is placed? Does the homeowner then have to pay the amount of the judgment? The mortgage lender is trying to recover their losses on your debt; a debt which is secured by one asset (your home).

If there is no equity and the property goes to the foreclosure sale, and the lender receives less than what is owed, the lender can pursue the judgment or issue a 1099. This still holds true even if it is the lender who gets the property at the foreclosure sale, and ends up selling it later at a loss. At the foreclosure auction, sale proceeds are used to pay off any liens on the title. The homeowner’s debt just did not magically appear because their home foreclosed and was sold at auction. Their debt was already established as the original mortgage on the property. And because the homeowner has defaulted on that debt to the lender, the lender is trying to satisfy the debt that already exists as the mortgage. The judgment that the lender is usually granted against the homeowner is simply a judge’s decision that has recognized that the lender is owed a certain amount of money and that the owners have not paid it.

The fact that your home has been foreclosed upon demonstrates that you are unable to pay; this means that it is not generally worth the lenders time to go after a deficiency judgment, since this is unlikely to help them recoup their losses. The lender knows that it will be difficult if not impossible to recover the money owed to them – and that it may well cost them more to pursue a judgment than it is worth. As such, they will typically write off any loss and go about their business as usual.

Basically a homeowner usually doesn’t need to worry about being sued for deficiency judgment after the foreclosure, even if the foreclosure laws allow it, because most lenders just don’t do it. But keep in mind, that they certainly can pursue it in some states. So always be prepared to seek legal advice as well.

Note: Just as with any other sort of judgment, a deficiency judgment will be reflected on the homeowner’s credit report.

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