What happens after a foreclosure sale when the home does not sell for enough money to pay off the mortgage? Mortgage companies can collect the remaining balance, and this leaves people owing tens of thousands of dollars after they have already lost their homes. Read on to find out what you can do about it.
I lost my home but still owe thousands of dollars! Why and what can I do about it.
HOMEOWNER PROTECTION GONE
A deficiency judgment comes when a mortgage company seeks to collect the balance remaining on a mortgage after a foreclosure sale. Before the real estate market fell apart, people seldom had this problem. Even if you do a short sale, mortgage companies sometimes insist on the homeowner agreeing to the deficiency judgment before the sale closes. Here's a typical example: the mortgage balance is $200,000 but the amount of the sale is $150,000-the now former property owners are liable for the deficiency of $50,000.
Until recently, homeowners had been protected from foreclosure deficiencies under "The Mortgage Forgiveness Debt Relief Act." This act expired on December 31, 2013. Foreclosures concluded in 2014 and after can have a deficiency judgment for the unpaid balance of the loan, attorney's fees, and interest gets tacked on until the judgment is paid. Deficiencies will be to be a growing problem for years until home values rise again.
The Anti-Deficiency protection only applied to mortgages to acquire property or a junior mortgage used to enhance the value of the home. Most 2ndmortgages and home equity loans obtained after the purchase of the home were not protected by the Mortgage Forgiveness Act.
EXCEPTIONS TO DEFICIENCY JUDGMENTS IN A FORECLOSURE
- Foreclosures concluded before December 31, 2013 for most homeowners; (reference: http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation-); or
- The mortgage company did not have personal or substitute service on the property owner and only served the law suit by publication; or
- The mortgage company obtains a money judgment but cancels the debt. But, then they are required to issue an IRS form 1099-C making the property owners liable for a large income tax debt.For more on debt cancellation, click here: 1099-C: Tax Consequences of Forgiven and Settled Debts.
- The mortgage was a non-recourse loan. This type is seldom seen for residences but some investment or business properties have these types of loans which have no personal liability.
In Cook County, Illinois and surrounding counties mortgage companies generally did not seek deficiency judgments against homeowners. But now? With the expiration of the Mortgage Forgiveness Act, homeowners are in much more danger of mortgage companies collecting money even after they have already taken a borrower's home.
WHAT YOU CAN DO IF FACED WITH A DEFICIENCY
Although you can try and negotiate the amount and payment terms of the deficiency, most people do not have the funds to pay even a portion of the thousands still owed. Homeowners often have to file bankruptcy. Chapter 7bankruptcy discharges the debt so the person who lost their house does not have to pay anything further. Even if the Chapter 7 was done before the foreclosure took place, the debt remains discharged as long the homeowner did not reaffirm the mortgage debt. This is probably the best option to avoid any money judgment.
The deficiency balance can also be discharged in a Chapter 13 bankruptcy on the following conditions: one, the confirmed plan "surrenders" the property; or, two, the automatic stay was modified during the Chapter 13 allowing the mortgage company to complete the foreclosure but without any possible deficiency judgment.
Both types of bankruptcy stop court proceedings to collect on a deficiency no matter how far along it is. If a mortgage company is just starting to sue for a deficiency or is about to get a judgment and garnish the borrower's paychecks, bankruptcy can get the borrower fast relief. No more court notices. No more garnishments. No more frozen bank accounts.
Second Mortgages are a special problem for property owners including homeowners. Second mortgage companies generally do not file foreclosures or bid at sheriff sales, so they get paid nothing when the home is sold. But, the second mortgage documents include a promissory note. They can sue the property owners even after a foreclosure.
If the homeowner has a 2nd mortgage of, say, $15,000 the mortgage company can file suit on the note itself. Upon obtaining a judgment they can pursue the homeowner the same as any other creditor. They can garnish wages, garnish bank accounts, and even seize no-exempt assets. Just like any other judgment, Chapter 7 or Chapter 13 bankruptcy is often needed to put a halt to the collections.
If you are in a foreclosure or facing the possibility of foreclosure, please call us. Our consultations are free and confidential
Robert J Adams & Associates has helped thousands of good people, just like you, save their home. Take advantage of our free and confidential consultation today.