Homeowners are often worried about further collection attempts after a foreclosure has been completed. After losing their homes, they worry about seeing their car repossessed, bank accounts levied, or wages garnished. But in most cases, there is little chance of a deficiency judgment or future collection attempts due to the numerous obstacles in the path of the bank.
This is the factor that most borrowers do not consider when worrying about the possibility of a deficiency judgment. It is often not in the bank’s interest to spend its time and resources pursuing previous foreclosure victims who found it difficult to pay back their original loans. It costs money and takes time to hire attorneys and proceed with another lawsuit in the court system, and there is little incentive to do so against defendants who proved they do not have the financial ability to pay a judgment.
There are at least five considerations that banks have to take into account before they proceed with suing and attempting to collect on a deficiency judgment. These considerations are as follows:
- Does the law allow a deficiency judgment?
- Was there a deficiency at the sheriff sale?
- What is the fair market value of the home?
- Is there a reason to expect the borrowers can pay?
- Is the judgment likely to be discharged?
These five issues are discussed in more depth in the paragraphs following.
The first consideration homeowners have to take into account is, does their state allow deficiency judgments after foreclosure? They should immediately look up their state foreclosure laws to find out if this is even a possibility, let alone probably. If they are not allowed, then there is no danger of garnishment. If yes, other factors will have to be met before collection efforts can resume.
Second, if the state allows a deficiency judgment, was there actually a deficiency at the sheriff sale? A deficiency is when the house sells for less than what the borrowers owe on it. If they owe $140,000 and the property is auctioned for $130,000, there is a $10,000 deficiency. Unfortunately, due to rapidly declining home values, many foreclosure auctions end with a deficiency.
Third, what is the fair market value of the home? Many courts will allow a deficiency judgment only for up to the actual value of the house. Using the example in the previous paragraph, if the house auctioned for $130,000 and the homeowners owed $140,000, but the fair market value is $135,000, courts may limit the deficiency to a maximum of $5,000. That is the fair market value ($135k) minus the sales price at auction ($130k).
Fourth, if the state allows a deficiency and there is one that is above the fair market value of the home, what gives the lender the incentive to go after the judgment? Many lenders will not bother with a deficiency judgment because they know that homeowners in foreclosure are strapped for cash. It costs more in attorney fees and court costs than the lender will ever be able to recover from most borrowers, so what is their incentive to sue for a deficiency?
The final consideration when examining the possibility of wage garnishment for a debt after foreclosure is that deficiency judgments are dischargeable in bankruptcy. If the bank gets a judgment against borrowers and tries to garnish wages, the former owners can file a Chapter 7 and have it eliminated, if they meet the other requirements for a Chapter 7 bankruptcy. So even in the worst case scenario, homeowners might be able to avoid wage garnishment.
Thus, unless many of these considerations work out in favor of the bank, there is little chance of a deficiency judgment. This does not mean that there are no such judgments, as some states allow the request for a deficiency to be included in the original lawsuit. However, it does mean that many lenders have decided not to pursue homeowners after the foreclosure is over and the home sold, regardless of whether the bank was completely paid back by the auction or not.