After foreclosure you could be victim of a “deficiency” judgement

In 41 states and Washington DC, lenders have the right to come after you for any balance due when they foreclose on your home and sell it.  That is, if your mortgage is, say, $200,000 and they sell it in foreclosure for $100,000, they can come after you for the balance — $100,000!  And in most cases they have up to twenty years to do it (with interest accumulating at rates around 8%).   You could think your foreclosure nightmare is long behind you when a sheriff shows up at your door with a court order.

The reason that this sad fact of mortgage life has not gotten too much attention is that many banks have not been exercising their right to go after a deficiency judgment.  But that is changing. Smaller banks and credit unions in particular have become much more aggressive in pursuing these judgements.  Also, banks have been selling the debt to third parties whose business model calls for them to pursue the balance.

If your house is underwater and you are in danger of foreclosure, there are some things you can do.

Short Sale. If you have not been foreclosed on yet, try to arrange a “short sale” in which you agree to find a buyer at current market value and the lender agrees to accept that amount in full payment of all of your obligations.  (There is more on these in our older entries. See: Consider a Short Sale for an Underwater Mortgage).

Negotiate them down. If you have some ability to pay part of the deficiency, you can probably get them to accept far less than the full amount.  When they sell this debt to third parties they get as little as 2 cents on the dollar according to the Wall Street Journal, so they can make money at far less than the full amount.

Bankruptcy. If you are really unable to pay, bankruptcy may be the best answer.  In most cases this process can wipe out the debt, but you need to discuss your situation with an attorney who does this for a living.  There is more info on bankruptcy in our previous post: Filing Bankruptcy May be your Best Option.

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