What You Should Know About Deficiency Judgments

If you own property in a state that allows deficiency judgments, this post is for you. If you don’t know whether your state allows deficiency judgments, go here.

A deficiency judgment is when a homeowner gets sued for the difference between the amount owed to a bank after it forecloses and sells the property. If you have a mortgage for $100k and the bank forecloses and sells it for $80k at auction, the deficiency amount would be $20k plus costs and attorneys fees.

You should be paying attention to the possibility of a deficiency judgment if your property is in a state that allows them. Avoiding a deficiency should always be a consideration when you’re thinking of how to dispose of your property in this market.

Why should you pay attention to this? Picture this scenario:

It’s sometime down the road, when the economy has recovered. You and everyone else you know has returned to work and things are going pretty well in general. You’ve managed to get beyond the financial disasters of the past and the future looks pretty good, until one day someone knocks on your door and serves you with lawsuit paperwork for the deficiency on your old mortgage.

If you think this can’t happen to you, think again. There are investors out there who are buying pools of debt instruments for pennies on the dollar. They will employ a bunch of scumbag debt collectors who will shake you down for whatever they can get. They will use technology to track down people who owe them money even when the bank did not and just because a bank won’t pursue a judgment against a homeowner for a deficiency doesn’t mean someone else will not.

It will totally suck for a lot of people in a few years when people are just starting to get back on their feet and only to be bit in the rear end by these deficiencies.

So how can you avoid this? Consult with an attorney in your state and make sure you ask about getting off the hook for these judgments when you are deciding how to get rid of your house.

There will be situations where you might not be able to negotiate your way out of a deficiency, especially on second liens and HELOCs. It’s my understanding that many banks will agree to waive the right to pursue a deficiency when they accept a short sale offer. This assumes that the person negotiating the short sale knows what they’re doing.

Regardless, you should always ASK the person who wants to help you get rid of your house if they can help you avoid a deficiency judgment or else you could face this scenario down the road.

Got questions? Send me an e-mail or comment below!

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