Can My Lender Pursue A Deficiency Judgment From A Short Sale?

As discouraging it is to lose your place to foreclosure, borrowers may still be liable for the deficiency amount. It’s the difference of what’s owed on the house loan and what the bank could sell for at an auction. “Deficiency judgments” can come after ex-borrowers at any unexpected time-frame after they have lost their house.

It can be an unexpected surprise for anyone who have sold their house through a short sale where the lender agreed to sell the house for less than the mortgage owed.

Vanessa Corey who made a short-sale on her Fredericksburg, VA home in April of 2008 is a real life example. After building her house in 2004, unforeseen setbacks which led to a bitter divorce coupled with the economic housing crisis forced her to sell the house through a short-sale arrangement.

As a property agent, she assumed the lender had agreed to disregard the difference in amount owed after the short-sale. Late last year, her legal representative produced a letter from her lender with a demand to pay an owed amount of $65,000. As she didn’t have the money, she declared bankruptcy.

There are a lot of financial institutions who decline to discuss the topic of ‘deficiency judgments’. Correy’s financial institution who lent her the money stated that they were targeting more people with deficiencies.

How Do You Avoid A Deficiency Judgment? It depends on which state the homeowner resides in. Other things include if the borrower has a second mortgage or other liens. It can definitely hurt homeowners if they disregarded the issue altogether.

Mr. Zaretsky, a property lawyer in Palm Beach, Fla said that once your bank has judgment on you, they can pursue you regardless of where you reside. They can demand for your financial records and have your salary taken away or have you jailed if you ignored any contact.

Financial firms can legally impose deficiency judgments in more than thirty states with the inclusion Fla, NY and TX states.

Fortunately in places like Arizona and California, they do not permit ‘deficiency judgments’. The other ten states that do not allow such judgments are Iowa, Alaska, North Dakota, Montana, Pennsylvania, Oregon, Washington, Wisconsin and South Carolina.

Even if banks are willing to disregard the deficiency amount, many homeowners do not know that they are required to ask for a release. To prevent a judgment against yourself, make sure that your lawyer asks your lender for a release.

Zaretsky says that homeowners should not take things for granted assuming that a deficiency judgment will not return and hit them. He believes that many of these judgments will be pursued over several years to come. It is important to note that these accounts were sold at a loss to various collection firms and third-party investors. These firms would not have purchased these loans if they weren’t eager in recovering the amount they paid for them.

Judgments don’t have to be obtained immediately by lenders or collection agencies. They may choose to wait until the debtors have financially recovered before they file with a court. In the state of Florida, the lender has up to 5 years to file. Upon receiving judgment, the lender has up to 20 years to collect the debt with interest.

Financial institutions and debt collection companies can hunt down ex-homeowners in spite of a minor debt. In 2004, Mr. Varno and his spouse achieved a short-sale arrangement with their property after he was laid off from his job. In 2008, to his surprise, the second lien holder demanded 25 K from him. Mr. Varno explained that they had already released the title thus making him not indebted to the 2nd lien holder.

Unfortunately, that was not the case. The release of the title does not mean that the debt will be extinguished. Due to the diverse variations in state laws, in general, a mortgage responsibility consists of 2 parts. The first part is the collateral in which the pledge is the asset or house. The second part is the promise and agreement to pay back the loan.

Banks may let go of liens in order to facilitate a short-sale. Doing so does not mean that the banks will also disregard the borrowers’ contractual promise to pay back the debt which are outlined in the promissory documents. Once the property is sold, the secured debt can change into an unsecured debt.

Zaretsky pointed out to one of his customers who went over the mountain when he got a short-sale. He blindly signed away all the papers that his loan agent had given him with the inclusion of a document that made him still legally responsible for the debt.

He was unaware that the financial institution could take that document and transform it into a deficiency judgment through the legal system.

Financial institutions are not very trustworthy or may not be acting on your best interest. Zaretsky explained of a separate borrower who was rich and eligible to pay off the debt. However, the financial institution did not reciprocate as they knew they can later come after him for a deficiency judgment.

Mr. Tolchinsky, a Florida state realtor claimed that financial institutions may pursue borrowers who walk-away if they suspect that they may have other listed assets.

Banks will research to see if it was a pure walking-away attempt where the borrower truly could not afford to make his or her mortgage payments. If they find out that the borrower has been making timely payments and is in financially sound status, he or she maybe targeted for the deficiency.

If you feel insecure of a probable deficiency judgment, it is highly encouraged to employ a real estate lawyer so as to be certain that there are no remaining deficiencies in the short-sale or deed in lieu agreement.

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