If my house was foreclosed on and sold back to the lender for the loan price, can the lender still get a deficiency judgement against me?

Get Legal Help Today

secured lock Secured with SHA-256 Encryption

If my house was foreclosed on and sold back to the lender for the loan price, can the lender still get a deficiency judgement against me?

Asked on July 23, 2011 Kansas

Answers:

M.D., Member, California and New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

Yes, it can. This is because a lender has not only the right to the remaining mortgage balance but to related costs as well. These include but are not limited to: legal fees, accelerated interest payments, back principal payments, in some cases pre-payment penalties, and other expenses as part of the judgment process. This is why a homeowner could owe more than they originally borrowed.

However, a lender doesn't always choose to pursue a deficiency judgement. The major factors are whether the lender feels it can collect the judgment and the cost of doing so. The lender will pull the borrower's credit to see what other outstanding bills they have and whether they are being paid on time. The homeowner may be asked to fill out a "Net Worth Statement" (NWS) which will disclose assets to the lender. This document is a major part of the decision to pursue a judgment or not.

If the lender has no reason to believe the homeowner has extensive assets, it will instead report the loan deficiency amount on IRS Form 1099. The result to the homeowner is a "phantom" or "imputed" income on the amount of the cancelled debt. However this means that they only have to pay income taxes on the amount of the deficincy versus paying the entire deficiency judgment. This is a substantial savings. Even better for them though is "The Mortgage Debt Relief Act of 2007" which generally allow a homeowner/taxpayer to exclude this phantom/imputed income on their tax returns (at least through 2012).  

Note: Depending on whether the foreclosure is judicial or non-judicial, and the specific terms of the mortgage, the bank may not be able to seek a deficiency judgment. Additionally, the deficiency judgment is determined by a court-approved "final judgment" amount in most states, which can be challenged by a borrower.

M.D., Member, California and New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

Yes, it can. This is because a lender has not only the right to the remaining mortgage balance but to related costs as well. These include but are not limited to: legal fees, accelerated interest payments, back principal payments, in some cases pre-payment penalties, and other expenses as part of the judgment process. This is why a homeowner could owe more than they originally borrowed.

However, a lender doesn't always choose to pursue a deficiency judgement. The major factors are whether the lender feels it can collect the judgment and the cost of doing so. The lender will pull the borrower's credit to see what other outstanding bills they have and whether they are being paid on time. The homeowner may be asked to fill out a "Net Worth Statement" (NWS) which will disclose assets to the lender. This document is a major part of the decision to pursue a judgment or not.

If the lender has no reason to believe the homeowner has extensive assets, it will instead report the loan deficiency amount on IRS Form 1099. The result to the homeowner is a "phantom" or "imputed" income on the amount of the cancelled debt. However this means that they only have to pay income taxes on the amount of the deficincy versus paying the entire deficiency judgment. This is a substantial savings. Even better for them though is "The Mortgage Debt Relief Act of 2007" which generally allow a homeowner/taxpayer to exclude this phantom/imputed income on their tax returns (at least through 2012).  

Note: Depending on whether the foreclosure is judicial or non-judicial, and the specific terms of the mortgage, the bank may not be able to seek a deficiency judgment. Additionally, the deficiency judgment is determined by a court-approved "final judgment" amount in most states, which can be challenged by a borrower.


IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although AttorneyPages.com has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

Get Legal Help Today

Find the right lawyer for your legal issue.

secured lock Secured with SHA-256 Encryption