Bankruptcy & Deficiency Judgments

by Tom Streissguth
Lenders who have foreclosed may also sue for a deficiency judgment.

Lenders who have foreclosed may also sue for a deficiency judgment.

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If you have gone through foreclosure and seen your home sold at auction, the bank that claimed your dwelling may not be quite finished. In most states, the bank can sue for a deficiency judgment if the selling price does not meet the outstanding balance owed on the defaulted loan. This means a long-term headache for former homeowners. However, in some cases, you might be able to discharge the judgment in bankruptcy court.

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Deficiency Judgment

A lender may petition for a deficiency judgment in civil court if it has foreclosed on a home and there is a shortfall between the amount of the mortgage debt and amount received from the sale. For example, if you lose a home through foreclosure, with $400,000 of debt still outstanding on the home before the bank sold it for $300,000, you have a deficiency of $100,000. If the court grants the lender's request for a deficiency judgment, the lender has the right to collect the deficiency, plus interest, even if you no longer live in the state. Although some states have laws preventing deficiency judgments, guidelines vary widely.

Collection

Lenders can pursue all legal avenues for collection of a deficiency judgment, no matter where you currently live. This includes levies on your bank account, garnishment of your wages, and seizure of property. A lender may also place a lien on your next home, preventing you from selling or refinancing the property without paying the lien first. Liens carry interest and if they are not resolved, their value gradually rises and destroys any equity you're building up in the property. Deficiency judgments run at least 10 years in most states and can be renewed until they are satisfied.

Bankruptcy

If your debts become overwhelming, you can petition for bankruptcy protection under Chapter 7 or Chapter 13 of the federal bankruptcy laws. In a Chapter 7, a court-appointed trustee seizes your property to repay creditors. In a Chapter 13, the trustee sets up a repayment plan for partial payment of your debts, both secured and unsecured. The plan runs for three to five years, in most cases, and requires you to make monthly payments, which the trustee disburses to your creditors. The plan also sets a percentage of unsecured debt to be repaid, usually around 20 percent. If you meet the terms of the plan, the bankruptcy court will cancel the balance of those unsecured debts the law permits to be discharged. This includes deficiency judgments, which are not secured by any property.

Secured Deficiency Judgments

If a lender has succeeded in claiming a deficiency judgment, and placed a lien on your property, the bankruptcy court will consider it a secured claim. That means the lender retains the right to foreclose on the lien after the bankruptcy case closes and your unsecured debts are discharged. In the meantime, the lien accrues interest and the lender may continue to renew it until you either sell or refinance the property. It's best to get a lien paid off as soon as possible, as trying to sell a home with a lien attached is difficult, even in active real estate markets.