One of the most often questions I get asked in reference to mortgage foreclosure defense and/or a short sale is reference to deficiency judgments. Unfortunately, many people are getting legal advice from either a CPA and/or a realtor and it can have dangerous side effects. I am going to attempt to answer some common questions I get asked and answer them to help educate on the topic. If you have any questions, please feel free to contact us at 1-888-ME-HELP-YOU.
Can the bank take money out of my bank account if they foreclose on my home? If depends. Normally, the answer is no. Yet, sometimes they do it anyway. My advice is never keep money where you borrow money. This will prevent them from taking money out of your account and then leave you fighting for it back. If the money is in another bank, they will be forced to go through a legal proceeding to even attempt to take your money.
What can happen if I just give the bank the house back?
That depends if they waive the deficiency or not. If they waive the deficiency, then be prepared to get a 1099 at the end of the year (which means you may owe taxes on the debt that has been forgiven). If they do not waive the deficiency, you could find yourself in another law suit for garnishment of wages or for a lien. Remember, just because they say they are waiving or you think you read that they are, does not mean they are. The banks are very tricky.
Can I trust the bank?
The quick answer is no. Don’t expect your lender to inform you that you can’t be held responsible for a deficiency. They are not fighting for what is in your best interest, no matter how nice the person is being to you. When negotiating a short sale or deed-in-lieu of foreclosure, make sure that that you obtain a complete release of liability. Some lenders may try to get you to sign a promissory note as part of the deal. Don’t do it; at that point you will have separated the debt from the property and your non-recourse protection could go away. You want a complete walkaway and there is no reason not to hold out for one. Some borrowers do choose to pay something toward the deficiency in exchange for a more favorable credit history. It’s best to have a lawyer go over any offer the lender makes you before signing.
Is there a true hardship involved?
If you are having problems paying your mortgage, apply for a modification. Keep in mind, just because they told you no once, does not mean that is their final answer. By documenting that you have a hardship, you may be able to save your home.
What about bankruptcy?
Bankruptcy does allow you to release a deficiency judgments. A Chapter 7 bankruptcy allows you to relinquish your non-exempt assets. If you file under Chapter 13, your mortgage deficiency may be included with the rest of your unsecured debt, and you’ll pay as much as the court requires over a three to five year period. Neither option is terrifically helpful unless you actually are insolvent.