Barbara Sadler: Do You Still Owe Money After Foreclosure?

Over the years, the most certain question, based on the course of action as it relates to foreclosure is:

• Will I owe the bank money after foreclosure?

The answer is: It depends. To be 100% sure, call Ascent Law and speak with one of the lawyers there. They can help you to know for certain one way or another.

As a house owner, that would be the main question for me as well. If you are not aware of the legal process in your market, you should learn. It is essential that you can answer this question for the owner when it arises. When the lender or bank foreclosures on the property, and they eventually sell the property for less than what was owed, then a deficiency exists with the loan. The weakness is the difference between what the house owner owed and the amount of property sold.

For example, Mary owes $100, 000, and the lender foreclose and sold the property for $60, 000 at auction. There is a deficiency of $40, 000 for which the lender can sue the house owner. The key phrase is “can sue”. However, this is a practice that rarely happens, but it’s a real concern for the house owner in most cases, the house owner wants nothing else to do with the lender once the property is sold at auction. If the deficiency judgement is granted, it would appear on the house owners’ credit card just as any other decision would appear.

The house owner(s), while they are not savvy to the short sale process, would want to know happens to the difference. Will they be required to pay the difference? During short sale process, house owners can negotiate with the lender, not to seek a judgement against them because they feel they’ve waived their right by accepting a short sale. There is a second issue as it relates to the deficiency, and that’s 1099. The lender will issue 1099 to the house owner for the difference. In Mary’s case, the lender will grant her 1099 for $40, 000. This will be reported as income Mary had received, and therefore she will have to pay taxes. Either way, the deficiency judgement can be of great concern to house owners. There are couples of actions that the house owner has, as it relates to the deficiency judgement. In Mary’s case, she should file bankruptcy to address the report. She could also short sale the deficiency with the lender at a later date. In other words, offer the lender a lesser amount as “payment in full”.

Here is an important note. The lender, if they issue 1099, cannot be sue for a deficiency judgement. The lender can only pursue one or the other. In other words, Mary can’t receive both a deficiency judgement and 1099 from the lender. As you disclose to the house owner this vital information, you must inform them about the consequences of the deficiency and 1099. They will decide to continue working with you or not. Most of them believed in the past that once the sale is completed, they are free and cleared. Collection activity begins almost a year after the purchase and it is relentless. Without the clause in the contract, house owners are liable for the remaining debt, especially to the second mortgage holder. These collection agents can pursue you aggressively, ruin your credit card, and may even take you to court for the amount owed. These collectors, of course, add their collection fees to the debt making the debt more substantial and harder to pay off.

Some states are still considered non-recourse states. What this means is that if a mortgage goes wrong and house is sold, the original borrower is not responsible for any difference in the loan amount. However, this non-recourse rule does not apply to second mortgages in any state. Borrowers must also be aware that many lenders have now resorted to including a promissory note in the contract. This note obligates the borrower to pay for the remaining balance of their debt to the lender after the short sale has gone through. Most lenders’ state will not approve a short sale without this guarantee. However, with proper representation by a real estate attorney, this pitfall can be avoided. House owners that are already facing financial problems do not need this additional grief. It is very important to have a clause in short sale contract relieving you of the responsibility of the balance of the loan(s). Short sale has become a widely practiced form of real estate selling in the previous years due to the market. Most lenders do not like the process and they continually change their guidelines for the procedure. Real estate agents, even those that specialize in short sales, cannot keep up with all the different rules and regulations set forth by the most lenders. For this reasons, it is crucial to have an attorney involved in the process. The charging off from the 2nd lien relates to an accounting entry. Your lender will not charge off the 1st lien, and if you go past due on the 1st lien, it will leads to foreclosure. Remember, the 1st and 2nd lien is very much different as far as the possible outcome for each that will occur if they’re past due.
The 2nd lien will likely stay past due to a certain point, and then if it goes beyond a certain point, the account will be charged off, and sold off for pennies to a collection agency. It will represent a loss or write off for your lender. The collection agency will try to collect the outstanding debt from you. You will get 1099 on the charged-off debt, it is subject to income tax, and therefore there are tax implications at the end of that year. You are still obligated to pay it off, you may or may not choose to do at this point. If you do not pay if off, it will remain on your credit for seven years, and it will affect your credit negatively when seeking future creditors, especially form mortgage companies. Having a charged off 2nd lien is similar to lot of debts, it drags your credit card down, and sits on it until you have paid, or falls as it is supposed to by law, the easiest way to get around 2nd mortgage lien is to make the payments. A 2nd lien will be charged off after going beyond 120 days. If you are strapped for money and can only pay your 1st mortgage, to try to keep the property from going to a foreclosure sale, concentrate on the 2nd lien, but do not neglect your 2nd lien.

Make sure you offer an occasional payment on the 2nd lien, so that it will get beyond 120 days. Use 120 days or less as the safety net to stay within and avoid a charge off. (FYI, a redemption period is a section of time allowed by law for you to pay the lender what you owe them for keeping your house. In some states, this redemption period will fall after the auction.
Here’s a general peak at what can happen after a foreclosure if you still owe, bear in mind that this varies depending on the state you live in.

An eviction

If you’re still in the house after the house has been auctioned, then the new owner (or the bank if there was no bidder) will have to go through a legal process to evict you. The eviction process can take up to 5 to 90 days, depending on your state law. You will not be dumped on the street without notification. The sheriff’s department will serve you notice of eviction and in that notice would be instructions and the time frame to get you out. If you want more details on the eviction process, then you will need to call the claim courts in your local courthouse. Ask the way eviction process works to understand exactly how many days you will have to leave the house after the auction. An eviction will only take place if ownership is transferred out of your name after the auction. Each mortgage can foreclose individually. If it is the second mortgage that goes to auction, then the property owner does not transfer to the highest bidder or the lender.

Redemption period

This is an amount of time that allows the house owner the opportunity to stop the foreclosure by paying the entire loan. Only some states have a redemption period, Wyoming is one of them. This usually starts after the auction, and in Wyoming, it runs for three months. A redemption period is a lifetime in which you can sell your house and get out of foreclosure that has already taken place. During this period, you cannot be evicted and you won’t be making any house payments.

Deficiency Judgement

In some cases, the lender is not able to sell your house for the full amount you owed on the mortgage. When this happens, the lender will seek what is called deficiency judgement to recover the rest of the money owed. This is done through the court system, so you will get notified if this happens and you might be summoned to court. Not all lenders seek a deficiency judgement, even if it is allowed in your state, the lender will not choose to find one after the auction.

Once the court allowed a judgement for the lender to recover the deficient amount, they might attempt to garnish your wages or take your assets to pay for the debt. In the judicial sates, when the initial complaint is filed to initiate the foreclosure process, the lender can also register for an automatic deficiency judgement if the auction doesn’t bring the full amount owed on the mortgage.

Not all states allow a deficiency judgement, again, each state is different and therefore, what happens after foreclosure will vary as well. It is obviously in the best interest of the house owner to be proactive and deal with foreclosure. At least there is a chance that the investor can negotiate away the deficiency before it even becomes an issue.