LENDERS PURSUING DEFICIENCIES
- Douglas M. Matton
- Jun 27, 2016
- 3 min read
Foreclosures still persist. The banks still claim that times are still tough, but they are still reporting quarterly profits in the billions of dollars. Nevertheless, they are continuing to come after homeowners. A few years ago the banks would not pursue a deficiency judgment against a homeowner.
However, now, that stance has dramatically changed.
Q: First, what is a deficiency judgment?
A: It is the balance of a loan that remains after a foreclosed home is sold at an auction.
Q: Can you explain that?
A: When a bank starts a foreclosure it does not really want the property. What it wants is the money it loaned out. Let’s say that that the bank loaned $300,000 to somebody and that person bought a home with it. Well, that homeowner put up the home as collateral. That collateral is an assurance to the bank that if the homeowner stops paying back the loan, then the bank can take the property in order to satisfy the loan amount. The big problem arises when the home is not worth the amount of the loan.
Q: How so?
A: Well, let’s say that the loan amount is $300,000 but the home is only worth $200,000. When that homeowner misses mortgage payments, the bank then starts the foreclosure process to get what it claims is owed to it. When the bank wins that foreclosure case, it takes the home and it sells it. However, if the home is only worth $200,000, then after the home is sold there will still be a balance of $100,000 left on the loan. That balance is called a “deficiency.” If you are underwater on your home then there is a very good chance that you could be liable for a deficiency.
Q: What do you mean “underwater”?
A: “Underwater” means that you owe more on your home than it is worth. Just recently a study showed that approximately 20% of Chicago area homes are underwater. That underwater status can lead to deficiency judgments.
Q: What can happen if there is a deficiency judgment against me?
A: It means that you will be held to be personally responsible for the balance of that loan to the bank. That means you must figure out a way to deal with it, either to pay it or to get rid of it in some way.
Q: Will the bank come after me for the balance?
A: Most likely it will. Either it will, or it will sell that debt to a debt collector which will aggressively pursue you for the debt.
Q: What can they do to me to collect the debt?
A: They can garnish your bank account. If they know where you bank, then the debt collector or the bank itself, can seize almost all of the money in your personal bank account, and then use it to help to pay off the balance of the loan. They can also garnish your wages. This means that they can take about 15% of your gross pay. They can continue doing so until the debt is paid off.
Q: What else can they do to collect the deficiency?
A: They can pull you back in to court and make you go through a question and answer period called a Citation to Discover Assets. That process entails you answering certain questions, under oath, regarding where all of your assets are and what those assets amount to.
Q: Does that mean I have to divulge everything?
A: Yes, it does. It also means that you might have to sell off your assets in order to satisfy the deficiency judgment. So, you may not only lose the home, but you could also lose 15% of your wages, have your bank account frozen, and be forced to sell some of your personal items.
Q: Is there a way to prevent a deficiency judgment?
A: Yes, usually there is. The first step is to make sure that you are represented by a competent and experienced attorney who handles foreclosures. Most attorneys do not handle foreclosures, so make sure that the attorney you do choose has experience in that area. If you are represented by an experienced attorney in the foreclosure matter, then that attorney should be able to negotiate with the bank throughout the foreclosure process so that if you do lose the home, then the bank will forgive the balance of the loan and not pursue you for that deficiency.
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