Deficiency Judgments: The Real Threat

You’ll find numerous internet sites showing the legal and theoretical possibilities of being sued after foreclosure. Many so-called “foreclosure experts” threaten homeowners with the possibility of being sued immediately after foreclosure, and having their wages garnished, cars repossessed, or given huge tax bills from the IRS. Given that so many state foreclosure laws do allow deficiency judgments, there is always the danger of becoming sued right after foreclosure. Nevertheless, the majority of the foreclosure advice being given to homeowners is wildly inaccurate. In practically each single case, what usually “actually” happens is…

Absolutely nothing.

The bank, soon after the foreclosure, would have to sue the former foreclosure victims for the deficiency judgment if one even exists. This indicates the bank would have to employ lawyers, pay lawyer fees and court costs, and would just have a judgment against them. There is no expectation that they would ever be able to collect on that judgment, and banks are conscious that homeowners go into foreclosure because they run out of money. So, if they know homeowners have experienced a financial hardship and don’t have any money, plus the mortgage company has already lost money on the loan on account of the foreclosure, there is certainly small reason for them to sue once again. They just move on with attempting to sell the property on the open market and recoup a few of their losses.

When a homeowner sells the property before the foreclosure and sells it at a lower amount than what’s owed on the loan, this is known as a brief sale, and is among the most typical ways that homeowners can stop foreclosure on their properties. In this case, the homeowners would get a 1099 at the end of the year, because the bank is forgiving the difference in the loan quantity. Forgiven debt is counted as income. But this really is only a possibility when a homeowner has worked out a short sale with the bank along with a buyer, plus the home has actually transferred ownership by means of the short sale.

When the house is sold at sheriff sale for a loss, this is not forgiven debt. It truly is merely a sale of the property, and homeowners don’t get a 1099 if they don’t get any profit from the sheriff sale and if no debt is forgiven. The property is just taken from them to spend the bank and the bank gets the property back mainly because that was pledged as collateral on the original loan. The legal mechanism of foreclosure allows for the sale of the property at a public auction, but has absolutely nothing to do with forgiving any portion of the actual debt represented by the foreclosure judgment.

To ensure that is what actually occurs in the vast, vast majority of foreclosure conditions. Banks hardly ever pursue deficiency judgments unless they know the homeowners have a lot of cash as well as other assets that would make it worth suing them. This is not the case in most foreclosures, although. While literally hundreds of on the net resources and charlatans will threaten homeowners with the possibility of a deficiency judgment and all of its ill effects soon after foreclosure, the banks themselves are wise adequate to recognize that suing their former clients will not be in their very best interests in all however the most extreme instances. Actually, most lenders would gladly give former foreclosure victims another loan, if they met the qualifications; so there is no reason to turn away future enterprise due to an unfortunate monetary hardship that led towards the foreclosure.