How to Avoid Deficiency Judgments

Tue, Jun 21, 2011

Bankruptcy, Debt Mitigation

Deficiency judgments are of great concern to those unfortunate enough to be involved in a foreclosure or short sale. A deficiency judgment occurs when a mortgaged property is sold for less than the remaining mortgage balance. The lender is then able to get a court-ordered judgment issued against the borrower for the remaining balance of the mortgage. With a deficiency judgment, your lender can garnish your wages, seize your bank account, levy on your car, and impact your business. This post discusses three ways to avoid a deficiency judgment.  For more detailed information or for a one-on-one consultation, please contact the attorneys at SmithLaw.

One way to avoid a deficiency judgment is when the lender voluntarily does not pursue the matter or the judgment is dropped. When a foreclosure occurs, the lender will review the original application and see what financial circumstances were present at the time of application. This research especially includes investigating the presence of PMI (Private Mortgage Insurance). (The presence of PMI can increase the chances that they will pursue a deficiency.) It never hurts to meet with the lender and keep the lines of communication open during the foreclosure process. It is possible that this positive dialogue could help cancel or reduce a deficiency judgment. It also is important to pay attention to the timeline of a case, as there is a deadline for the lender to file for the judgment. The volume of foreclosures in Florida could make this deadline difficult to meet.

A good way to avoid a deficiency judgment is through a negotiated short sale. Trying to pursue a short sale is often the best option for many faced with a foreclosure. A short sale is agreed upon by the homeowner and the lender, and often one of the negotiated terms is the release of the deficiency after the sale goes through.  The lender is agreeing that they will take the amount of the sale as payment for the loan, and leave the borrower alone and forgive the remaining balance. Sometimes a lender might require some extra payment in addition to the proceeds of the sale, but this is just part of the negotiated process. Real estate agents, attorneys, and mortgage professionals are able to counsel on the details and requirements of a short sale. You should know, however, that the release of the deficiency is NOT AUTOMATIC in a short sale in Florida, and must be negotiated.  Some lenders will allow a short sale to proceed but will still reserve the right to pursue the deficiency after the closing.

The most effective method for avoiding a deficiency judgment involves filing for bankruptcy. If a short sale or a foreclosure results in a deficiency judgment, or a threatened deficiency judgment, then bankruptcy might be the best option for you.  A Chapter 7 or Chapter 13 bankruptcy can discharge a deficiency judgment (or threatened deficiency judgment), which means that the debt is gone forever.  Most people find that the cost of a bankruptcy is FAR LESS than the price of a deficiency judgment.

Many have found themselves in a foreclosure situation with the slumping housing market in Florida. Education about the matter, negotiation, and legal advice are the best ways to combat a deficiency judgment. If a mortgage company does proceed with a judgment, a skilled attorney should be called upon to present evidence showing why the claim is invalid. It could be possible to beat the case with appraisals and other financial information.

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