As horrible it is to lose your home to foreclosure, ex-homeowners may still be on the bait for the deficiency amount. This is simply the difference of what is owed on the mortgage and what the bank could sell at an auction. “Deficiency judgments” can haunt borrowers, years after they have lost their home.
It can happen to homeowners who have achieved short-sales where the bank had approved selling the home for less than what it was worth.
Vanessa Corey who performed a short-sale on her Fredericksburg, VA home in Apr of 2008 is a genuine illustration. After remodeling her place in 2004, unexpected events which led straight to a sour divorce and the burst of the housing bubble, compelled her to sell her home via a short-sale.
As a property agent, she assumed the lender had agreed to disregard the difference in amount owed after the short-sale. Late last year, her legal representative produced a letter from her lender with a demand to pay an owed amount of $65,000. As she didn’t have the money, she declared bankruptcy.
Many lenders refuse to comment regarding the issue of ‘deficiency judgments’. In the case of Corey’s lender, BT&T clearly indicated that they were pursuing more homeowners with deficiencies.
Are You Protected From A Deficiency Judgment? Whether banks can pursue such a feat depends on several factors including what state the borrower lives in. Other factors include whether there is a second mortgage or other liens involved. It can certainly haunt borrowers if they chose to ignore the possibilities of deficiencies.
Real-estate attorney, Mr. Zaretsky mentioned that if your financial lender has achieved a judgment on the borrower, they can target you despite of your location. They have the power to ask for your financial records, hold your wages and put you in jail if you continued to turn away from their requests.
Financial firms can legally impose deficiency judgments in more than thirty states with the inclusion Fla, NY and TX states.
Luckily they do not allow ‘deficiency judgments’ in California and Arizona. Other states that prohibit these judgments include Wisconsin, South Carolina, Washington, Pennsylvania, Oregon, N. Dakota, Alaska, Iowa and Montana.
Although lenders are willing to forgive the deficiency amount, many borrowers are not aware that they are required to request for a release. To avoid any unforeseen surprises, ensure that your attorney requests the bank to release you of any future obligations.
According to Zaretsky, people should not have a false sense of security thinking that a deficiency judgment will not come back and haunt them. He expects many of the deficiency judgments will be filed over the next few years as many of these accounts were sold at discounts to numerous collection agencies and third parties. These organizations would not have bought these accounts if they were not planning on recouping their initial investments.
Banks or collection firms do not act in obtaining judgments right away. As a strategy, they may act patient and allow debtors to financially improve prior to filing with the legal system. For example, banks have up to five years to file in Florida state. Once judgment is obtained, the bank has up to twenty years to pursue the debt with interest.
Lenders and collection agencies can come after borrowers regardless of how small the debt. Case in point, Richard Varno and his wife short-sold their Nashville house in 2004 when he became unemployed. Four years later in 2008, the second lien holder was after him for $25,000. He argued by informing them that they had released the title and he was no longer liable.
Unfortunately, that was not the case. The release of the title does not mean that the debt will be extinguished. Due to the diverse variations in state laws, in general, a mortgage responsibility consists of 2 parts. The first part is the collateral in which the pledge is the asset or house. The second part is the promise and agreement to pay back the loan.
Lenders may release property liens so as to enable a short-sale transaction but not necessarily releasing borrowers’ obligations to pay back the loan based on the promissory notes. Upon the sale of the home, the secured debt can transform into an unsecured debt.
Zaretsky claimed that one of his clients’ who was so excited in obtaining a short-sale, carelessly signed all the documents that his real estate agent provided him including a confession that clearly made him still legally liable for the debt.
He was unaware that the financial institution could take that document and transform it into a deficiency judgment through the legal system.
Lenders can also be unreliable. Zaretsky had another client who was willing and financially able to pay off the deficiency but the bank did not bother asking as they reserve the right to pursue the deficiency judgment at a later point.
Property agent Mr. Tolchinsky from Florida, mentioned that banks can sometimes pursue borrowers who abandon their home with the knowledge that they may have money or other assets they can pursue.
Financial institutions may conduct due diligence to see if the home was abandoned due to real reasons of the borrowers’ financial hardship. It this was not the case, the financial institution will come after the borrower for the remaining debt.
If in doubt, it is advisable to seek legal advice to ensure that your short-sale or deed in lieu agreement does not contain any deficiencies therefore allowing your lender to pursue you in the future. To alleviate any risks, it is important for your attorney or counselor to negotiate the deficiency out of the short-sale or deed in lieu contract.
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