How a deficiency judgment can effect you the homeowner
Help in preventing financial damage in a foreclosure.
Some basics to consider when you’ve defaulted on a note to a lender.
The note involved in a foreclosure or repossession is an "I Owe You": a
promise and an obligation for you to pay the debt owed to the lender
that financed your property. A deed of trust, or mortgage on the
property, is the security for that debt. If you’ve had troubles paying
your obligations or are no longer capable of making the payments, you
are facing a default situation.
When a default situation arises, it's always better to try to work out a
practical solution. There are numerous ways in which creative problem
solving may come into play. A first step would be to communicate clearly
and early with the lender. You can consider alternatives such as a loan
modification, waiving unpaid payments, extending the amortization or
lowering the payments. Amending your agreement with the lender may
provide you with relief and the lender may allow get paid back or avoid
a foreclosure process.
There are several avenues that a lender can pursue in enforcing their
rights. When a default on the note is at hand, the lenders legal options
with this default are:
Sue on the note
When a case goes to court, the lender can sue only on the note. They may
institute a lawsuit in court against the payor or borrower, asking the
court to require them to pay all money owed to the lender. A judgment
can be obtained in court, requiring the full amount of the note payable
to the lender. A judgment can attach all non-exempt assets owned by the
borrower, allowing the lender to take those assets to satisfy the amount
of the judgment. Exempt assets are those necessary for livelihood and
are specified by state or federal law.
Many states will not allow such a suit. In many states, if a suit on the
note is filed, a foreclosure on the Deed of Trust or Mortgage is barred.
Other states will require a foreclosure process first, followed by a
suit on the note. You should note that these types of suits are not the
norm, as a foreclosure on a secured property is the primary means of
satisfying the note outstanding.
An in-court foreclosure is called a judicial foreclosure, a lawsuit with
specific parameters. Again the foreclosure laws will vary a great deal
from state to state. A judicial foreclosure allows the lender to
institute a lawsuit calling the entire note due and requesting a court
ordered sale of the property to satisfy the note
When a judicial foreclosure permits the calling of the note due, taking
the property may not be enough to satisfy your debt. The lender will
gain a deficiency judgment against the borrower. A deficiency judgment
demands that, if the lender does not receive all amounts due them from
foreclosure sale of the property, the remaining balance of the debt
should be paid by the borrower. The rules and requirements of both
property types and borrower actions will vary greatly by state, so
competent legal counsel is absolutely necessary.
Non judicial foreclosure
With an out of court process, or non-judicial foreclosure, the process
is usually handled by an attorney or a foreclosure professional. In some
states, the process allows the lender to re-take the property without
getting any other compensation from the borrower. Other states will
allow a deficiency judgment after the foreclosure process is completed.
This type of foreclosure occurs when borrower has no other obvious
assets or ability to pay, when the property is worth more than the loan
outstanding, or when it appears that this is the only legal option.
In general the borrower has rights to bring payments up to date, in
which case, the note may not have to be paid off. In many states the
borrower may also have redemptive rights after the process has occurred.
Deed in lieu of foreclosure
Another way of dealing with a mortgage default that will require the
cooperation of both the lender and the borrower is to transfer the
property by means of a deed in lieu of foreclosure. Fast and inexpensive
(legal fees), both parties agree to transfer the property to lender,
avoiding the time and expense of foreclosure. Most importantly, the
borrower may avoid the possibility of the lender pursuing them for a
The possibility always exists that declaring bankruptcy may be the last
form of refuge in a loan default. Lenders will want to avoid such a
situation as bankruptcy creates numerous delays at a considerable cost.
Competent legal counsel should be sought in determining if this is the
right avenue for you
With all of the alternatives discussed above, the specific rules
applicable to your state will determine whether you would face the risk
of having a deficiency judgment ordered on behalf of the lender. Utilize
our site and the resources offered to make an educated decision as to
how to proceed if you in financial distress, facing foreclosure or are
in the midst of the process.