Although the topic of deficiency judgments has been discussed several times on this blog already, it is one of the most commonly asked questions that homeowners have regarding losing their homes to foreclosure. One reason for this, of course, is the fact that home values have decreased nationwide, and foreclosure victims know that their properties will not sell at the county sheriff sale for an amount that will pay off the loan in full. Therefore, they are worried about having to pay the difference to the mortgage company, and the possibility of the lender suing them after foreclosure and going after their other assets. However, in nearly all cases, there is no danger of former homeowners being sued for a deficiency judgment after they have lost their homes to foreclosure.
To understand how the deficiency is created in the first place, it is necessary to know how the foreclosure auction works and what happens to all of the liens affecting the property. When the sheriff sale of the house is conducted by the county sheriff, the sale proceeds are used to pay off any liens on the title. Most of the time, it is the first mortgage company that purchases the property at the auction, and they bid the minimum amount required by law to take ownership. In effect, they are using their own money to buy the home at auction to pay off their loan to the homeowners. But they do not pay off the entire amount of the loan unless necessary, which will created a difference between what is owed on the house and what is actually sells for at auction. Just because the proceeds do not pay off the entire amount of the mortgage, however, does not mean the former homeowners are automatically responsible for coming up with that difference.
To be responsible for the difference at all, the state foreclosure laws will have to allow the bank to sue the foreclosure victims for a deficiency judgment. Not all states allow this in all cases, so homeowners need to do some research under what conditions a lender in their state can sue after the foreclosure. If the state does not allow for deficiency judgments, then there is no danger at all of being responsible for the difference, and no reason to worry about having the car repossessed or having wages garnished.
Even if they are allowed to sue the homeowners, though, banks rarely go after a deficiency judgment. Just as the foreclosure victims are worried about how they would ever pay tens of thousands of dollars in judgments, the mortgage company is worried about how they would ever be able to collect it and how long the process would take. Foreclosure victims usually go into foreclosure because they lost income, so getting another judgment against them will not help the bank recover any lost profits. In fact, pursuing a deficiency judgment after foreclosure will often prove to be an exercise in futility for both the mortgage company and the homeowners.
Ever further, it will cost the bank more time and money to hire local attorneys to sue their former clients, and then try and collect on the judgment. All of these legal and collections-related expenses are resources expended before the bank can collect even one penny of the debt. Combine this with the fact that they know the homeowners had some financial hardship that caused them to miss their mortgage payments for a number of months, and there is little reason for the bank to believe that the former homeowners will be able to pay the judgment in any time frame that would make it worth it to them. The money that would be used to pursue the deficiency judgment could more effectively be put towards new loans or investments.
So, homeowners almost never need worry about being sued by their bank after the foreclosure, even if the foreclosure laws allow it. The bank could theoretically try to make them pay the balance after the foreclosure auction, but lenders almost never do this. Unless the homeowners were extremely wealthy and owned numerous other liquid assets, the bank will simply move on and allow the foreclosure victims to move on with their lives, as well. This is often the best resolution to the foreclosure for all parties involved. What can happen in theory rarely happens in practice, in the case of deficiency judgments.
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