The Curse of Deficiency Judgments After Foreclosure
Former homeowners around the country are rudely awakened to the knowledge that a lender can pursue them for monies not recovered in a foreclosure sale of their home. This is known as a deficiency judgment. It results after the lender sells the home for less than is owed on the mortgage. Until recently, lenders had what seemed like a lifetime to pursue homeowners but some states such as Maryland and Florida have reduced that time to 3 and 1 year respectively.
Reuters writes about the nightmare former homeowners attempting to rebuild their lives after a foreclosure face with bank levies, wage garnishments etc. Bank’s will sue and once a judgment is entered can levy on all of your personal assets as well as take up to 25% percent of your after tax pay. For someone trying to rebuild, a judgment of that amount may take years to pay off.
Options
1. Settlement – Lenders are willing to entertain settlements for less than the full balance. I have settled deficiency judgments for as little as 12% of the balance. But keep in mind the debt forgiveness income may apply and increase your taxable income.Lenders are likely to issue 1099s. I recommend consulting your tax preparer because if you are insolvent at the time of the debt forgiveness then the debt forgiveness is not income for tax purposes.
2. Negotiate Deficiency before Short Sale or Deed-in-Lieu.
3. Bankruptcy: A chapter 7 or 13 bankruptcy may save former homeowners a fortune and prevent future hardship. As you can imagine, a garnishment of up to 25% of one’s pay could result in the loss of your current apartment or home. A chapter 7 allows debtors to walk way from most of their consumer debt without having to pay a penny. A chapter 13 i s known as a wage earners bankruptcy in that debtors propose a repayment plan for as little as 15% or as much as 100% of the debt owed over 3 or 5 years.
In fact, I highly recommend homeowners with more than one mortgage or home equity lines of credit obtain a consultation with a bankruptcy lawyers if they are thinking of a short sale or about to lose their home to foreclosure. Why? Your credit is going to take a hit when either one of these events happens and therefore you might as well clean out the debt at the same time. Waiting two or three years after you have rebuilt your financial life to deal with this debt puts you back in the hole.
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