Recently on our bankruptcy forum a user asked, “I am about to lose my house through a bank foreclosure. If they end up selling my house but the sale price is less than the mortgage will I have to pay the difference? I have heard something about some states having anti-deficiency laws. What do I need to know about a deficiency?”
What are anti-deficiency laws?
In some states homeowners who lose their house through foreclosure may be responsible for paying the difference between the sale price and the loan amount. This difference is referred to as a deficiency.
Other states, however, have passed what are referred to as “anti-deficiency laws” which protect homeowners from having to pay for certain losses following a foreclosure sale.
Understanding your state’s laws
While most states do allow the lender to pursue the homeowner for any deficiencies, the method allowed to request the deficiency can vary. For example, if your state requires the lender to go through the court system to complete the foreclosure process it’s likely that the lender will include the deficiency repayment as part of the lawsuit.
On the other hand, if your state does not require foreclosures to go through the court system the borrower will probably have to file a separate lawsuit to recover the deficiency.
Additionally, not only will the method to request the deficiency vary by state, state laws will also determine how much the lender can recover. For example, some states cap the recovery of the deficiency to the difference between the original loan amount and the house’s fair market value.
How likely is the lender to sue for a deficiency?
Now, it’s important to note that state laws outline whether or not the lender is allowed to sue for a deficiency judgment. State laws, however, do not determine whether the lender will sue for the deficiency.
Suing and taking homeowners to court can be very expensive. Some lenders simply evaluate the money they can recover and compare that to the costs of the suit and decide it’s not worth their time and effort to attempt to recover the deficiency.
What if I file Chapter 7 bankruptcy?
If you live in a state which allows the lender to sue for a deficiency judgment and the lender has decided to sue, you may need to seek legal help.
If you have already had your home repossessed there’s a good chance that you do not have the money to repay a judgment. In some states the court may allow the lender to repossess property, put a levy on your bank accounts, or ask for a wage garnishment.
If you don’t own anything or you are not employed then a judgment will do very little because you have no assets or income for the lender to recover.
Another option you might consider if you cannot pay the deficiency and you have other unsecured debt is to file Chapter 7 bankruptcy. If your house has already been repossessed then any remaining debt associated with the house is now unsecured and can be discharged.
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