Deficiency Judgement

How a deficiency judgment can effect you the homeowner

Help in preventing financial damage in a foreclosure.

Some basics to consider when you’ve defaulted on a note to a lender. The note involved in a foreclosure or repossession is an "I Owe You": a promise and an obligation for you to pay the debt owed to the lender that financed your property. A deed of trust, or mortgage on the property, is the security for that debt. If you’ve had troubles paying your obligations or are no longer capable of making the payments, you are facing a default situation.

When a default situation arises, it's always better to try to work out a practical solution. There are numerous ways in which creative problem solving may come into play. A first step would be to communicate clearly and early with the lender. You can consider alternatives such as a loan modification, waiving unpaid payments, extending the amortization or lowering the payments. Amending your agreement with the lender may provide you with relief and the lender may allow get paid back or avoid a foreclosure process.

There are several avenues that a lender can pursue in enforcing their rights. When a default on the note is at hand, the lenders legal options with this default are:

Sue on the note

When a case goes to court, the lender can sue only on the note. They may institute a lawsuit in court against the payor or borrower, asking the court to require them to pay all money owed to the lender. A judgment can be obtained in court, requiring the full amount of the note payable to the lender. A judgment can attach all non-exempt assets owned by the borrower, allowing the lender to take those assets to satisfy the amount of the judgment. Exempt assets are those necessary for livelihood and are specified by state or federal law.

Many states will not allow such a suit. In many states, if a suit on the note is filed, a foreclosure on the Deed of Trust or Mortgage is barred. Other states will require a foreclosure process first, followed by a suit on the note. You should note that these types of suits are not the norm, as a foreclosure on a secured property is the primary means of satisfying the note outstanding.

Judicial foreclosure

An in-court foreclosure is called a judicial foreclosure, a lawsuit with specific parameters. Again the foreclosure laws will vary a great deal from state to state. A judicial foreclosure allows the lender to institute a lawsuit calling the entire note due and requesting a court ordered sale of the property to satisfy the note

When a judicial foreclosure permits the calling of the note due, taking the property may not be enough to satisfy your debt. The lender will gain a deficiency judgment against the borrower. A deficiency judgment demands that, if the lender does not receive all amounts due them from foreclosure sale of the property, the remaining balance of the debt should be paid by the borrower. The rules and requirements of both property types and borrower actions will vary greatly by state, so competent legal counsel is absolutely necessary.

Non judicial foreclosure

With an out of court process, or non-judicial foreclosure, the process is usually handled by an attorney or a foreclosure professional. In some states, the process allows the lender to re-take the property without getting any other compensation from the borrower. Other states will allow a deficiency judgment after the foreclosure process is completed. This type of foreclosure occurs when borrower has no other obvious assets or ability to pay, when the property is worth more than the loan outstanding, or when it appears that this is the only legal option.

In general the borrower has rights to bring payments up to date, in which case, the note may not have to be paid off. In many states the borrower may also have redemptive rights after the process has occurred.

Deed in lieu of foreclosure

Another way of dealing with a mortgage default that will require the cooperation of both the lender and the borrower is to transfer the property by means of a deed in lieu of foreclosure. Fast and inexpensive (legal fees), both parties agree to transfer the property to lender, avoiding the time and expense of foreclosure. Most importantly, the borrower may avoid the possibility of the lender pursuing them for a deficiency judgment.

Bankruptcy

The possibility always exists that declaring bankruptcy may be the last form of refuge in a loan default. Lenders will want to avoid such a situation as bankruptcy creates numerous delays at a considerable cost. Competent legal counsel should be sought in determining if this is the right avenue for you

With all of the alternatives discussed above, the specific rules applicable to your state will determine whether you would face the risk of having a deficiency judgment ordered on behalf of the lender.