You fell behind on your house payments and couldn’t catch up. Your lender foreclosed on the house and sold it to someone else. While it hurts to lose your home, at least you can move on and start rebuilding your life. Unfortunately, that’s not always the case. Lenders can sometimes use a “deficiency judgment” to force you to pay thousands of dollars more.
What is a Deficiency Judgment?
When lenders foreclose on properties, they resell them so they can collect some or all of the money they originally loaned the borrower. But they aren’t always able to sell the property for the full amount of what they are still owed. This is especially true if home values have declined.
For example, you owed $180,000 to your lender when your house went through foreclosure. The lender sold the house for $150,000—$30,000 less than what you owe them. If they choose to, the lender can then go to court and ask for a deficiency judgment. If they are approved, they can force you to pay back that $30,000 difference.
If you have a deficiency judgment against you, you do legally have to pay the money back. The mortgage lender can garnish your wages, draw from your bank accounts and even take some of your personal property in order to recover its loss on your home.
Can a Deficiency Judgment Happen to Me?
Whether you can be forced to pay a deficiency judgment depends largely on the state where you bought the house. Most states allow this type of legal process, but California has some important laws that protect people against deficiency judgments.
In California, most foreclosures are non-judicial. This means that you’ll almost definitely need the assistance of a foreclosure attorney to fight the foreclosure, but the lender will not be allowed to pursue a deficiency judgment. The only exception to this rule is if a different lender holds a second mortgage on your property. That lender may be able to ask for a deficiency judgment, but the primary lender cannot.
If your foreclosure was judicial, your lender must file their application for a deficiency judgment within three months of the foreclosure sale. A fair value hearing will held, and the judge who handled your foreclosure will decide how much the lender is owed. This amount will be based on whichever is less: the difference between the amount you owe and what the home sold for or the amount you owe and what the fair value of the home was when it was sold.
One more way that California protects homeowners is the One Action Rule. This rule states that a lender must choose between a nonjudicial foreclosure, a judicial foreclosure or suing you for the balance of your mortgage. They can only pursue one form of action to recover the money they are owed.
What are my Options?
If your lender does have a deficiency judgment against you, you should consult with a foreclosure attorney, but your best option may be to file Chapter 7 bankruptcy. This is because, in most cases when you file for bankruptcy, the lender’s deficiency judgment will be treated as unsecured debt. Since there is no collateral associated with the debt, once your bankruptcy is concluded, the debt will be erased.