Homeowners are often worried that the foreclosure process will never end. The bank will sue them, publish their personal financial problems in the newspaper, take their home back, evict them, and then sue them again for any deficiency from auctioning the property. With the anticipation of a deficiency judgment, borrowers may feel like they will never be able to restart their lives and move on after foreclosure.

However, this is most often simply not the case. The potential for a deficiency judgment, while it exists, can be microscopically small. For a variety of reasons, banks do not pursue homeowners after foreclosure, even if there is a deficiency. As well, there are numerous state and local statutes and court decisions that place limits on how much money a bank can even obtain from this type of lawsuit.

First of all, many lenders decide not to sue for a deficiency judgment because they know that homeowners are unlikely to have any other assets with which to pay the debt. Most borrowers default on their home due to financial hardships such as a job loss or major medical expense. It is probably safe to assume that families in this position do not have the income or assets to pay a judgment for tens of thousands of dollars.

In many cases, the bank, in order to obtain such a judgment, will have to spend several hundred or thousand dollars out of its own pocket. Court fees must be paid if another lawsuit is to be brought into court, and attorney costs will be paid out of pocket by the bank to proceed with the deficiency lawsuit. After losing so much money from the foreclosure and auction of the home, banks most often cut their losses instead of look for a deficiency.

State statutes regarding deficiency judgments also come into play and can dramatically affect how much the bank is able to sue for or recover from the former homeowners. However, borrowers should also be aware that most anti-deficiency judgment statutes apply only to purchase-money mortgages, and second mortgages or refinances may not be affected by these particular laws.

In fact, some states have simply banned deficiency judgments against borrowers when the foreclosure was done nonjudicially through a power of sale clause in a deed of trust. Borrowers in these states can be completely safe from being sued after foreclosure. Although the nonjudicial process affords the fewest legal protections during the foreclosure, it may offer the best chance of avoiding being sued again after the auction.

Other states place restrictions on how much a lender can recover from a deficiency by limiting the amount of the judgment. This is done by giving borrowers a credit for the "fair value" of the property. The fair value is determined by figuring out what the property is actually worth, and this will most often be defined by the statute itself. It may not mean the sales price at auction or the market value of the home, so it is important to read to the state law on the issue.

Another restriction that has been placed on banks seeking deficiency judgments is strict time frames in which the judgment can be initiated. If banks were able to wait years before suing the former owners, it may be nearly impossible for the family to get on with its financial life. Instead of having borrowers live with the threat of a lawsuit, states have decided that deficiency judgment suits must be pursued almost immediately after foreclosure, or the opportunity to do so is eliminated.

Lenders may also have procedural restrictions placed on their ability to sue borrowers after foreclosure. In some cases, the bank may have to provide additional notices to the owners informing them of the intent to seek a deficiency judgment. As well, the bank may be required to seek a determination of deficiency in the original lawsuit, rather than bring a lawsuit seeking the judgment after the sheriff sale has been conducted.

Many of these restrictions may come into play at the same time, while banks will run into one after another in other foreclosures. These limitations and additional requirements, along with the likeliness of never being able to collect on the judgment, ensure that the majority of homeowners are safe from being sued for a deficiency. While it is not impossible to be sued by the bank, the legal hurdles to overcome in pursuing this lawsuit make it somewhat rare in the world of foreclosures.

Homeowners are often worried about further collection attempts after a foreclosure has been completed. After losing their homes, they worry about seeing their car repossessed, bank accounts levied, or wages garnished. But in most cases, there is little chance of a deficiency judgment or future collection attempts due to the numerous obstacles in the path of the bank.

This is the factor that most borrowers do not consider when worrying about the possibility of a deficiency judgment. It is often not in the bank's interest to spend its time and resources pursuing previous foreclosure victims who found it difficult to pay back their original loans. It costs money and takes time to hire attorneys and proceed with another lawsuit in the court system, and there is little incentive to do so against defendants who proved they do not have the financial ability to pay a judgment.

There are at least five considerations that banks have to take into account before they proceed with suing and attempting to collect on a deficiency judgment. These considerations are as follows:

• Does the law allow a deficiency judgment?
• Was there a deficiency at the sheriff sale?
• What is the fair market value of the home?
• Is there a reason to expect the borrowers can pay?
• Is the judgment likely to be discharged?

These five issues are discussed in more depth in the paragraphs following.

The first consideration homeowners have to take into account is, does their state allow deficiency judgments after foreclosure? They should immediately look up their state foreclosure laws to find out if this is even a possibility, let alone probably. If they are not allowed, then there is no danger of garnishment. If yes, other factors will have to be met before collection efforts can resume.

Second, if the state allows a deficiency judgment, was there actually a deficiency at the sheriff sale? A deficiency is when the house sells for less than what the borrowers owe on it. If they owe $140,000 and the property is auctioned for $130,000, there is a $10,000 deficiency. Unfortunately, due to rapidly declining home values, many foreclosure auctions end with a deficiency.

Third, what is the fair market value of the home? Many courts will allow a deficiency judgment only for up to the actual value of the house. Using the example in the previous paragraph, if the house auctioned for $130,000 and the homeowners owed $140,000, but the fair market value is $135,000, courts may limit the deficiency to a maximum of $5,000. That is the fair market value ($135k) minus the sales price at auction ($130k).

Fourth, if the state allows a deficiency and there is one that is above the fair market value of the home, what gives the lender the incentive to go after the judgment? Many lenders will not bother with a deficiency judgment because they know that homeowners in foreclosure are strapped for cash. It costs more in attorney fees and court costs than the lender will ever be able to recover from most borrowers, so what is their incentive to sue for a deficiency?

The final consideration when examining the possibility of wage garnishment for a debt after foreclosure is that deficiency judgments are dischargeable in bankruptcy. If the bank gets a judgment against borrowers and tries to garnish wages, the former owners can file a Chapter 7 and have it eliminated, if they meet the other requirements for a Chapter 7 bankruptcy. So even in the worst case scenario, homeowners might be able to avoid wage garnishment.

Thus, unless many of these considerations work out in favor of the bank, there is little chance of a deficiency judgment. This does not mean that there are no such judgments, as some states allow the request for a deficiency to be included in the original lawsuit. However, it does mean that many lenders have decided not to pursue homeowners after the foreclosure is over and the home sold, regardless of whether the bank was completely paid back by the auction or not.

One of the greatest worries from homeowners trying to save their homes from foreclosure is that the bank will sell their property at auction and then sue them again for a deficiency judgment. While it is uncommon for banks to do this to borrowers, many still worry about it because the lenders will threaten the possibility of it and no one wants to deal with additional lawsuits after foreclosure.

Although even more uncommon than deficiency judgments, homeowners may be able to turn the tables on the banks by suing for their own type of deficiency judgment. In times of rising home prices, as was the case during the housing boom a few years ago, properties that sell for less than their fair market value at auction but are quickly resold by the lender may indicate violations of good faith and due diligence.

Interestingly, in a number of court cases, homeowners sued the foreclosing lender for purchasing the house at a sheriff sale and then quickly reselling the property at a profit of tens of thousands of dollars. The mortgage company (or trustee in the case of nonjudicial foreclosure states) has the duty to use good faith in conducting the auction and obtaining a fair price for the property.

Lenders that purchase the properties that they are foreclosing on are held to an even higher standard of acting in good faith and obtaining a fair price for houses that they put into foreclosure. Otherwise, banks would be able to foreclose on homes, use the court system to have properties sold at county auctions, buy them back up at distressed prices, and resell them for quick, easy gains on the sales.

Obviously, this would present an even more biased legal system than the one already in place, although banks and servicers have been suspected of using exactly this tactic in the past to increase profits. But former homeowners who understand the duties the bank has to them and recognize when they are being violated may be able to take back some of the bank's profits.

In Murphy v. Financial Development Corp., for instance, a bank bought a property it was foreclosing on at auction and then resold it three days later for $11,000 more than it was originally purchased for. The court decided the bank had violated its duties to the homeowner of good faith by knowing it could get a higher price soon after the auction. The bank did not attempt to get a fair price for the property at the county sale.

In another case, the court decided that the bank, despite there being a deficiency on the mortgage after the auction, could not pursue a deficiency judgment because it had contracted a day before the judgment was to be entered to sell the property for more than it was sold at auction. This is a pretty apparent case of the lender knowing the fair market value of the property was higher than it was advertised at auction and taking advantage of homeowners.

It should be obvious that banks will do whatever they can to take advantage of homeowners facing foreclosure. They violate fiduciary duties, duties of good faith, hire lawyers to violate court procedural rules, blackmail Congress for bailout money, and will still be willing to go after borrowers for a few more pennies that they do not have.

Authorities always say that ignorance of the law is not a defense against breaking the law. Homeowners should keep in mind that their ignorance of the law is an excuse used by banks over and over again to take advantage of them. Even in cases where lenders should be paying homeowners, they take advantage of their ignorance of the law to pursue deficiency judgments after foreclosure.

Question
I am in a situation where I might be able to continue making my first mortgage payment but not my second. I did live in the house before moving and it is my only house.

I rent out the house, that is how I am able to pay the first. The second is totally unsecured at this point. The only asset I have is my wages. I'm thinking of continuing to pay the first as long as possible and see what happens with the second.

I would like to keep the house but I'm also not emotionally attached to it. It would be easy for me to make a business decision about it and stop paying if it gets to the point where I can't afford it anymore (like if the renters don't renew their contract).

I don't have any other debts but I'm thinking that I might file for bankruptcy to protect myself in the future. I have no assets and I barely make it paycheck to paycheck.

Do you think I should cut my losses and file for bankruptcy? Or should I keep current with the first as long as possible?

Answer
If I was in your situation, here's how I would look at the two choices -- paying the mortgage or filing bankruptcy.

If I could afford to keep paying the house, all my other bills, and fund a savings plan, and I cared about my credit, then I would keep paying on the house. I would list it for sale, hoping for a short sale, but wouldn't count on that. If I didn't care about all that, I would probably just stop paying and let the house go into foreclosure. I'd let the tenants know that I couldn't afford the house anymore and let them either keep living there for free or let them break the lease early and move out when they found something else.

Once the house went into foreclosure, I would do everything I could to get the two mortgage companies to agree not to sue. I would try to get the second mortgage to settle for even just a few thousand dollars (paid through a monthly payment plan), and then fight the first bank's foreclosure process by attempting to delay it in court for as long as possible. In the meantime, if I could delay it, I would try to work with the first mortgage company for a deed in lieu of foreclosure with no possibility of deficiency judgment.

If none of that worked and the first foreclosed and the second sold the debt, I would let the house go and just wait. Since all I have is my wages and no other assets, I figure the banks would not even bother selling the debt or going after a deficiency judgment. If, on the outside chance they did try to sue me, I would file Chapter 7 bankruptcy. Since I live paycheck to paycheck, my income is under the median for the state, so I can't be forced into a Chapter 13 payment plan. I would have the debts discharged and all my nonexistent assets would still be mine.

That's what my gameplan would be for that situation. Some may say that potentially having a foreclosure and bankruptcy on your credit would be the worst outcome. However, banks rarely sue for deficiency judgments, so filing bankruptcy may not ever be necessary. And the use of credit is somewhat overrated anyway. Credit cards are a death trap, and people with a foreclosure on their history can qualify for a mortgage 2-3 years after losing the home, as long as they have a down payment for the house.

So far in the foreclosure crisis and resulting meltdown of the financial markets, there does not seem to have been an increase in the number of banks seeking out deficiency judgments against homeowners. On the contrary, the market has really only seen increases in the number of banks attempting to unload their bad mortgages onto the government.

As a result, it may be easier to get a loan modification through the government, if the loans are eventually taken over (like with Bear Stearns or AIG mortgages). But banks have not increased their activity in pursuing foreclosure victims for deficiency judgments.

If homeowners are planning on using the "produce the note" defense to avoid a deficiency judgment, though, they should do that in their defense to the bank's foreclosure lawsuit. Immediately upon being served with the paperwork, they can file a Motion for Extension of Time to request an additional 30 days or so from the court to put together their answer. Then, based on the contents of the complaint and the bank's actions up to that point, borrowers can file a Motion to Dismiss based on the bank not providing the original note.

In their answer to the complaint (which would not have to be filed until after the Motion to Dismiss has been ruled upon), homeowners can claim the bank has suffered no losses because of its bailout by the government. To sue for foreclosure, the bank must suffer a loss on the contract -- it can not transfer the note to the government and still sue for recovery of damages.

This defense may not have been used yet, and how far it will get homeowner is debatable, but the longer borrowers can drag out the lawsuit, the better chance they might have to force the bank to negotiate a loan modification, deed in lieu, or other solution.

If nothing else, homeowners can probably hire an attorney for a few thousand dollars and get an extra 6-12 months to live in the foreclosed house mortgage-free. By then, the bank may be willing to negotiate a deed in lieu just to get control of the property and move the owner out of the house.

In those negotiations, borrowers can specifically demand that the bank give up any right to sue them again for a deficiency judgment or any other damages. Although the deficiency may not be a problem, this route may give homeowners the peace of mind they are looking for.

Homeowners facing foreclosure are often concerned that the auction of their property will not be the end of their financial and legal worries. The threat of a deficiency judgment being initiated by the lender after the sheriff sale is always being raised by foreclosure consultants, attorneys, and representatives of the bank trying to wring more money out of borrowers. But finding actual cases of deficiency judgments against the average homeowner can be extremely difficult.

Is this an indication that banks are not pursuing deficiency judgments, or is it simply that these types of lawsuits are so rarely mentioned? Finding actual statistics relating to this type of lawsuit is difficult, and proving that they are rare can be even more trying, as it is nearly impossible to prove a negative. The absence of judgments against homeowners does not mean that they are never brought; after all, maybe every foreclosure victim defends the case and wins. Or these lawsuits are just rarely talked about. Or maybe former homeowners have deficiency judgments against them but, since they moved out of the house where paperwork was served, they are not even aware of it.

So finding evidence of deficiency judgments after foreclosure is not easy. Not for me, and seemingly not for other researchers online. Frank Llosa from FranklyRealty.com also wonders where these lawsuits are and comes to some of the same conclusions as we have, although he approaches it from the angle of banks bidding on properties at auction for the total amount due on the loan, thereby eliminating the possibility of a deficiency: "Why would they take over the property at $200,000 OVER what is it worth and let the previous owner be releaved [sic] from further obligations?”¹

He suspects that the missing lawsuits may be an indication of the fact that foreclosing lenders, “figure it is a waste of time and effort for the banks to go after the homeowner since they are broke."¹ This is much the same seemingly reasonable solution that I have raised before; after all, why would a lender, who has been thus far unable to collect on a foreclosure judgment, spend more time and money pursuing deficiency judgments against former clients?

The Florida Asset Protection Blog also mentions the possibility of deficiency judgments in cases where a second mortgage is present, but admits no personal experience with such lawsuits: "I have not seen any case to date where a first or a second mortgage lender has sued the homeowner personally."² Same here, and these deficiency judgment laws, in the states and under the conditions in which they are allowed, have thus far proven to be unused weapons, similar in volume of enforcement to jaywalking violations.

Taking a look through actions in the local courthouse is also a bit of a wild goose chase, as there are far more foreclosures than deficiency judgments. In fact, there are no deficiency judgment cases that I could locate listed in my local court system. And this is in a state with a quick process and such lawsuits are allowed after the sheriff sale. Dozens of foreclosure cases, both open and closed, are listed, but no deficiency judgment cases involving the same defendants as the foreclosure cases in any of the listings I could find.

And online, instances of this type of lawsuit can most often be found in estate cases and auto loan repossessions, but not real estate foreclosures. Of course, this makes more sense, since someone who loses a car can still be served with lawsuit paperwork at a current address, car loan outlets have more access to local courts, and the small amount of an auto loan deficiency may be reasonably expected to be paid back.

Since it seems that deficiency judgments during foreclosure are quite rare, why are lenders not pursuing them right now? As has been discussed here before, it is usually just not worth the bank's time to sue people who admittedly have little money. About.com states that, "In many cases, your lender will not go to the trouble. Legal action is expensive and time consuming, and people who just suffered a foreclosure often don't have the assets or income needed to satisfy a deficiency judgment."³ People with no job, assets, or not enough income may also be “judgment proof,” meaning that, even if the bank got the deficiency judgment, it could not be enforced or collected.

And when families are made homeless because of the actions of the bank, it may be difficult to get a legitimate judgment against people who can not be reasonably located to be served with court documents. Few former homeowners leave a forwarding address when the move out of a property before eviction, being completely aware of the fact that their lives would be much simpler without further correspondence from the mortgage company. Since the bank suing for the deficiency is obviously also responsible for the fact that the defendants may not have a current address, former homeowners later claiming the lawsuit was never properly served is not a difficult argument to make.

Also, an important point for homeowners to remember is that, if they put down less than 20% of the purchase price, they are probably paying Private Mortgage Insurance (PMI). Even though the homeowners themselves pay the PMI premium on a monthly basis, this kind of policy insures the bank against the default of the loan, and if an owner goes into foreclosure, the insurance will pay the bank the amount of the mortgage left unpaid. Therefore, if a mortgage is covered with PMI, the bank can collect the insurance on the policy they forced on the borrowers instead of seek a deficiency judgment. Citifinancial itself states that, "If you have Private mortgage insurance, a lender can use this money to offset any losses instead of getting a deficiency judgment."⁴

Now, investors and second home owners who have substantial assets may be at higher risk of being sued than first homeowners. But this is a very recent 2008 development. Robert Levin from Fannie Mae, announcing changes in the first quarter of 2008, stated that, "We are pursuing deficiency judgment against investors and second home borrowers."⁵ Will this be the case in all second home or investment home foreclosures by Fannie Mae? Only time will tell, but there is still little evidence that any deficiency judgments have been pursued thus far, and the nationalization of the mortgage giants will probably change this plan.

In fact, with the nationalization of the banking system and the Government Sponsored Enterprises, it is highly unlikely that any borrower whose loan that is taken over by the government will be subject to a deficiency judgment lawsuit. Instead, the politicians, in order to soften the backlash against the $700 billion bank bailout and to reassure constituents, will push much harder for loan balance writedowns, interest rate adjustments, and other loan modifications to make mortgage more affordable for borrowers.

So, it seems that deficiency judgments have been and will remain quite rare in the mortgage industry. Having extenuating circumstances (lots of land, numerous liquid assets, clear evidence of mortgage fraud) may put certain owners in danger, but the vast majority who took out loans and then faced an economic hardship will continue to have little to worry about from their bank after losing a home. There are just too many problems, from serving the lawsuit, to collecting on it, to bad PR, for the banks to think it is worth the extra bother.

Sources:
¹ http://activerain.com/blogsview/506776/Virginia-Deficiency-Judgement-Judgment
² http://floridaassetprotection.blogs.com/alperlaw/2008/07/deficiency-ju-1.html
³ http://banking.about.com/od/loans/a/deficiencyjudg.htm
⁴ http://www.citifinancial.com/glossary/defin/DeficiencyJudgment.htm
⁵ http://seekingalpha.com/article/75938-fannie-mae-q1-2008-earnings-call-transcript

One of the reasons homeowners have such a fear of being sued by their bank for a deficiency judgment after facing foreclosure is that nearly any lawyer they contact will bring up this possibility. Some attorneys may even use the threat of further litigation after foreclosure as a reason to file bankruptcy prematurely or otherwise pressure borrowers into retaining legal counsel throughout the process of disposing of the home. Lawyers, though, have a vested interest in keeping clients in fear of litigation, even for such a rare case as deficiency judgments.

Many in the real estate market are aware of the fact that banks rarely, if ever, sue former homeowners after a house has been lost to foreclosure. It is simply not in the bank's financial interests to hire local attorneys to pursue another lawsuit in the courts and obtain a judgment when it was unable to collect on the initial foreclosure judgment except by selling the underlying asset, the real estate. Lenders know that it may be difficult even to locate the borrowers after a foreclosure in order to serve them properly with the lawsuit. As well, it will be even more difficult to collect the potentially tens of thousands of dollars owed from families who just lost their largest (and sometimes only) asset and who have no respectable credit score to maintain.

But none of this common sense matters when real estate or bankruptcy attorneys are threatening foreclosure victims with the potential of such a judgment and the possibility of having their wages garnished, retirement accounts seized, or similar implausible scenarios. It would seem that this is little more than fearmongering, lawyers attempting to wring a retainer fee out of homeowners or push them into paying a filing fee for bankruptcy. But there are a number of reasons that homeowners are threatened with a deficiency judgment every time they speak with a legal professional regarding foreclosure.

Obviously, in states where deficiency judgments are allowed, there is the possibility of the bank suing homeowners to obtain one. If lawyers did not mention the possibility, and the mortgage company then sued after foreclosure, the homeowners may feel they had been improperly advised. Thus, lawyers should mention any possibility of litigation relating to the foreclosure matter at hand, including future lawsuits even after the house has been auctioned off. From the lawyer's perspective, past behavior is no indicator of future actions, and just because few banks have ever brought this lawsuit to court in the past does not mean financial firms will never use the law to go after former homeowners for even more money.

Homeowners , though, should evaluate the potential of being sued under such a case and not be afraid to ask their lawyers how many deficiency judgments they have had direct experience with and under what circumstances they occurred. A couple of such cases in decades of practice is a strong indication that banks may still be avoiding such lawsuits against former clients. Also, if the only homeowners the attorney is aware of who were sued after a foreclosure had clearly engaged in mortgage fraud or had substantial liquid assets they bank was aware of, and the current borrowers do not fit into such categories, then the fear of a deficiency may be unfounded.

There is little debate that America is now a society paranoid about being sued and knows that there is always the potential for a frivolous lawsuit by anyone against anyone else, and that the more resources one party has the more likely that party is to win. It should be no surprise that the legal profession is filled with some of the most unhappy people in the working world¹. Everyone fears a group of people who spend most of their time parsing words and phrases, looking for the simplest reasons to hang others on such legalese.

In foreclosure cases, in the best case a small local bank with tens of millions of dollars is suing a homeowner with little; in the worst case a multinational corporation with over a trillion dollars in assets is suing a homeowner with little. The deck is always stacked in favor of the mortgage companies in such instances in terms of financial resources and time available to go litigating for years. Unless homeowners wish to go down fighting on their own, there may be little money with which to mount their own legal defense with legal assistance.

Attorneys often find themselves in a difficult position in terms of discussing the real possibility of litigation with clients. Although the potential to be sued in any given situation is often quite minuscule, lawyers live in a world where everyone is always trying to get an advantage over everyone else and no one can solve a problem without the fine print and a judge to interpret it. To such eyes, the possibility of a deficiency judgment is a real one and one worth losing sleep over, just because the law is on the books allowing banks to go after former homeowners. Under the circumstances, it is borrowers who need to look a little closer and analyze the reality of the situation with some common sense and from the bank's perspective; i.e., why would the lender sue a homeowner again after foreclosure?

Source:
¹ http://business.timesonline.co.uk/tol/business/law/article2045254.ece

If you own more than one home and are facing foreclosure, you are probably worried about the bank going after your second home if you are unable to save the first. Bank representatives and armchair foreclosure experts will threaten you with being sued again and losing your other home, having your other assets repossessed, and maybe even having your bank or retirement accounts stolen or wages garnished. Fortunately, however, many of these predictions will never turn into reality.

The issue of foreclosure does need to be taken seriously, though, and finding out your options should be the first consideration. The first thing you should do is consider various other solutions instead of just letting a house go through the foreclosure process. Try and get as much time as you can from the bank, even if a sheriff sale is coming up; the bank can postpone any foreclosure proceedings in the local courts or cancel an auction to give you more time to work on a solution.

You might want to consider trying to list your house for sale, even if you have to do it with a short sale and convince the bank to take less than the total amount you owe on the loan. Otherwise, if there is really no way to save the home and the lender is unwilling to do a short sale, you can offer the bank a deed in lieu of foreclosure, which will, upon the bank's acceptance of the offer, stop foreclosure and allow you to give the house back to the bank instead of going through the entire legal process and seeing your house auctioned off by the county.

But if the house does go into foreclosure and you do lose it to a sheriff sale, this does not mean the bank can go after your other house or any other assets you still possess. A number of different requirements must be met for a bank to try and sue you again after the foreclosure. Most of these requirements are easy to meet, but the last one usually guarantees that the bank will not take the time to pursue another lawsuit to go after your other personal items or additional homes.

First, the house has to sell at the county auction for less than the total amount owed on the loan at the time of the sheriff sale. This is usually pretty easy to meet, since the bank will have added thousands of dollars in fees so that no one in their right mind (not even the bank) would pay that much for the house. Usually, it is the foreclosing bank that places the only bid on the property, and they bid the minimum amount, so the house is likely to sell for far less than the total amount owed. The bank will end up with the property and a convenient write-off for the lost portion of the debt.

Second, your state has to allow deficiency judgments in the case of foreclosure. Not all states allow this in their foreclosure laws, so make sure you look up your law and find out if they can sue you and under what circumstances. Even if the lender is allowed to pursue another lawsuit, the type of foreclosure used, whether judicial or nonjudicial, can also be a determining factor in how difficult it will be to start the lawsuit and how it must be pursued.

Finally, you actually have to have something of value that the bank would want, usually some highly liquid asset the bank can easily seize. That does not mean having another home, to be clear. If the bank got nothing back from you on this foreclosure, what makes you think it would be worth their time to go after your other home? Would they get anything for their time and money, or would they most likely just get stuck with losing even more money when the home sells for too little at an auction to pay off even the existing mortgages, let alone a deficiency judgment?

So, maybe the bank could go after your other house after you lose one. But, in practical terms, banks almost never do this, since it just is not worth their time. It costs them more to hire attorneys to sue you for the original foreclosure, then sue again after that for a deficiency judgment, then sue you again for foreclosure on your other home because of nonpayment of the deficiency judgment. And in the end, they will probably still end up with nothing to compensate them for their total expenses.

One of the great questions that homeowners have while battling foreclosure is what the bank may be able to take from them even after they have taken the house. Many foreclosure victims fear deficiency judgments, believing that they may lose a second home, car, or even their bank accounts and retirement funds. This is a reflection of the general lack of knowledge of how foreclosure works, since the possibility of the bank going after any of these assets is very small.

During the entire foreclosure process, only the house used as collateral can be taken by the bank. Since the homeowners pledged the property as collateral for the loan when they originally applied for the mortgage, the lender will sue for the forced sale of that home to pay off the loan. They can not sue for anything else to be sold to satisfy the loan because nothing else was pledged as collateral, and they can not pursue any deficiency judgment unless a deficiency is created by the county sheriff sale. If the homeowners find some other way to stop foreclosure before the auction, then the bank can not sue for a deficiency, even if the homeowners use a short sale, where the bank takes less than what is owed, or a deed in lieu of foreclosure, where the bank takes the property instead of any payment.

In terms of a deficiency judgment after foreclosure, the bank may be able to go after other assets, but any retirement funds the former homeowners have are generally protected. Especially if they invest their retirement savings in an IRA or through work in a 401(k), 403(b), or similar program, then the bank can not try to seize any of these savings. However, if their retirement funds are "invested" in a second home or a prize race horse, then the bank may be able to to go after those other assets. That is because specifically designated retirement accounts are protected from creditors, while assets simply invested in for the purpose of saving for retirement without the special designation are not protected.

More relevant than what the mortgage company may be able to take after the foreclosure, though, is the issue of banks going after anything at all. In most cases, the lender rarely pursues the deficiency judgment after the home has been sold at sheriff sale. Mortgage companies know that people in foreclosure do not have the money to pay the monthly mortgage payment, let alone pay the entire foreclosure judgment or a deficiency judgment after foreclosure. Thus, it is just not worth the lenders' time to keep suing homeowners with no expectation of ever collecting anything from the lawsuits.

The only institutions currently going after any homeowner's retirement funds are the banks and government, but not through the foreclosure process. However, they are inflating the money supply, manipulating the interest rates, and generally contributing to a slowing economy which makes retirement funds worth less right now. Unfortunately, this kind of theft can not be stopped by homeowners, but they can rest assured that the banks and government will be unable to go after their retirement funds directly by seizing them to pay off a deficiency judgment, even in the case of foreclosure.

Although many homeowners worry themselves over the possibility of being sued after foreclosure, few seem to know exactly how a deficiency judgment works. There is no way to tell for sure whether or not the bank will even be able to go after this, let alone if they will decide to pursue the additional lawsuit. Homeowners can only find out the risk they have to a deficiency judgment once the foreclosure has already gone through and the home has been auctioned off. They will not be able to find out before the sheriff sale of the property, because the bank and county do not know how much the property will sell for.

The mortgage company and county government, before the sheriff sale, know only how much the judgment is against the the homeowners, which is why they are selling the house. Of course, they may run comparable sales, order a broker's price opinion, or otherwise attempt to come up with a realistic value for the property, but nothing is settled until the sheriff sale is actually conducted. If the foreclosed home sells for more than enough to cover the amount owed on the mortgage at the time of auction, then the bank has absolutely no grounds to continue with another lawsuit after the foreclosure.

Thus, the homeowners will just have to wait for the sheriff sale of the house to find out if a deficiency judgment is even a possibility. If the home sells for less than the total amount that was owed to the mortgage company, which is entirely probable, then the former owners will have slightly more to worry about. The bank may be able to sue them, depending on the state foreclosure laws, after the auction for the difference between what they were owed and how much the house sold for. This is not allowed in all states, but just having a deficiency in the amount paid at auction and amount owed does not automatically mean a deficiency judgment will be pursued by the mortgage company.

In fact, why would the bank bother to sue the foreclosure victims again? They were unable to pay the monthly mortgage, they could not stop foreclosure by selling or refinancing to pay off the foreclosure judgment, and the county government had to force their home to be auctioned off to the highest bidder. Those are not the actions of a person who has the financial ability to pay tens of thousands of dollars in further judgments after foreclosure, and the lenders are well aware of this fact when considering whether or not to sue for a deficiency judgment.

Homeowners should not take this as a personal attack against their willingness to pay their debts -- foreclosure happens because people run into unexpected financial hardships when they are unprepared to deal with them. But from the bank's perspective, that hardship protects the foreclosure victims from the lender trying to go after even more of the owners' resources. They will have to hire local attorneys again to initiate another lawsuit in the local court system for the deficiency. Then the bank will have to try to collect on it, when the homeowners proved they were unable to pay back the mortgage loan and foreclosure judgment they had to begin with.

Thus, it is not really in the mortgage company's interest to sue the homeowners again after they have just lost a home to foreclosure. The time and money spent on pursuing another worthless, noncollectable judgment could be much better spent soliciting for new customers or preparing the home to be listed on the open market. Unless the homeowners have vast, liquid assets (not second homes or automobiles or collectibles) that the bank could seize, there is very little reason to expect that they will be sued for a deficiency judgment if they lose their home to the foreclosure process.

Unfortunately, one of the more common consequences of homeowners facing a financial hardship is a lawsuit in one form or another. This may be from the mortgage company foreclosing on the house, or another creditor or collection agency trying to leach off the crisis of a productive member of society who is facing a temporary setback. Lawyers, despite the fact that a majority of them are unhappy with their jobs, spread around their own despair by targeting homeowners and courting creditors in order to try and collect judgments from people who need help, not lawsuits. The two lawsuits that foreclosure victims seem to be most worried about are ones that result in deficiency judgments or liens against their home from a creditor that can be turned into a foreclosure.

Deficiency Judgments

Being sued for a deficiency judgment after foreclosure seems to be one of the greatest worries of homeowners in danger of losing their homes. Not only are they behind by thousands of dollars on their mortgage payment and facing a public auction of their house, the ordeal may continue even longer. If they are sued for a deficiency judgment for the amount that the bank does not recover from the sale, then they may have to pay tens of thousands of dollars years into the future for their one financial hardship that led to foreclosure. Thankfully, this is often not a danger to the vast majority of homeowners, as mortgage companies usually will not go after a deficiency judgment.

Not all states, though, even allow mortgage companies to sue homeowners after the foreclosure process has ended, so homeowners should consult their foreclosure state laws before worrying about the possibility at all. If the state in which the first property is located allows for deficiency judgments, then the bank could theoretically sue after the sheriff sale of the house. However, they can not just automatically put a lien on any other home or property, or garnish wages; the lender would have to take the homeowners back to court, hire local attorneys to file the lawsuit paperwork, get the judgment from the court, and try to have it enforced in the county to where the homeowners have relocated after moving out of the foreclosed home.

So, after the bank has already lost a lot of money on the sheriff sale of the property in foreclosure, they are going to spend even more money and resources chasing after another judgment against the homeowners who were unable to pay the mortgage or first judgment. The first judgment, for the foreclosure, was a waste of their time, since they just got stuck with a property that may be worth far less than what they had loaned on it, and many homeowners face foreclosure because of a financial hardship that seriously alters their income. This is, of course, why they fell behind on the mortgage payments in the first place.

In fact, since the foreclosure victims are no longer the owners of that house, the court may not even know where to serve them the paperwork for the lawsuit. If they do not have an address, they can not be served very well, which means the judgment will be shaky, at best. Homeowners may find out that they were served incorrectly and have the deficiency judgment overturned, which would cost the lender even more money in legal fees to try and prove that services was made. The mortgage company will have to keep expending resources to pursue a judgment that they may never be able to collect on.

Furthermore, there is little reason to expect that people, just after foreclosure, have tens of thousands of dollars to pay a judgment. The former owners know they do not have the money. The bank knows they do not have it. It will cost them more money to begin the lawsuit and try to collect than the banks will ever be able to get out of the homeowners. This is why the banks do not even bother with suing for deficiency judgments after foreclosure, in nearly all cases.

Unsecured Creditors' Liens

Other creditors, however, may try and sue homeowners in order to get a lien on a property. In this case, they may try to obtain payment of the debt by a sheriff sale of the house, thus pushing it into foreclosure. Even in this case, though, many homeowners can use other options in order to avoid losing the home or having to keep paying the judgment even if the house does not sell for enough at auction to pay it off completely.

In this case of being sued for some other debt besides a defaulted mortgage note, the same principles apply as in the deficiency judgment. The creditor can try to take the homeowners to court to get a judgment, then have the judgment enforced as a lien on their home. Will they try to force the foreclosure, though, even if they obtain the judgment and a lien is placed on the house?

They probably will not go this route, because they would most likely not get anything from the sheriff sale if there is a mortgage (in default or not) on the house. The mortgage would be paid off first, and there is usually nothing left over afterwards to pay the other liens. Many properties at sheriff sale do not even sell for enough to pay off the first mortgage in full, and liens of unsecured debt may be in line to be paid after back property taxes, a first mortgage, second mortgage, and home equity line of credit, most of which will not be paid off completely or at all.

This is not to say that homeowners should not try and get the debt taken care of before it becomes a lien on the home. They can try to work with the creditor to avoid the lawsuit, and establish a forbearance for a few months while they are recovering from their financial hardship, or put together a payment plan for the debt once they have enough income. If all else fails, many homeowners in foreclosure or facing financial collapse are clearly insolvent right now (owing more than their assets are worth), so a Chapter 7 bankruptcy might be used to eliminate unsecured debt (such as what they owe the creditor discussed in this section) and allow them to keep their home.

It seems that the very rich of society, like the Googles and Microsofts of the world, and those facing financial hardship are the most widely targeted for lawsuits to collect money. The rich are targeted because they can pay millions of dollars just to get rid of the lawsuit and bad press and will not be affected. The poor or financially unstable are targeted because the stresses of their current situation combine with their own ignorance of the court system to make them extremely easy targets for miserable lawyers looking for company and bottom-feeding collection agencies. Knowing the dangers of being sued before or after foreclosure, as well as what options can be used to fight back, are essential for homeowners to avoid being taken advantage of by creditors for decades after recovering from their financial hardship.

Although the topic of deficiency judgments has been discussed several times on this blog already, it is one of the most commonly asked questions that homeowners have regarding losing their homes to foreclosure. One reason for this, of course, is the fact that home values have decreased nationwide, and foreclosure victims know that their properties will not sell at the county sheriff sale for an amount that will pay off the loan in full. Therefore, they are worried about having to pay the difference to the mortgage company, and the possibility of the lender suing them after foreclosure and going after their other assets. However, in nearly all cases, there is no danger of former homeowners being sued for a deficiency judgment after they have lost their homes to foreclosure.

To understand how the deficiency is created in the first place, it is necessary to know how the foreclosure auction works and what happens to all of the liens affecting the property. When the sheriff sale of the house is conducted by the county sheriff, the sale proceeds are used to pay off any liens on the title. Most of the time, it is the first mortgage company that purchases the property at the auction, and they bid the minimum amount required by law to take ownership. In effect, they are using their own money to buy the home at auction to pay off their loan to the homeowners. But they do not pay off the entire amount of the loan unless necessary, which will created a difference between what is owed on the house and what is actually sells for at auction. Just because the proceeds do not pay off the entire amount of the mortgage, however, does not mean the former homeowners are automatically responsible for coming up with that difference.

To be responsible for the difference at all, the state foreclosure laws will have to allow the bank to sue the foreclosure victims for a deficiency judgment. Not all states allow this in all cases, so homeowners need to do some research under what conditions a lender in their state can sue after the foreclosure. If the state does not allow for deficiency judgments, then there is no danger at all of being responsible for the difference, and no reason to worry about having the car repossessed or having wages garnished.

Even if they are allowed to sue the homeowners, though, banks rarely go after a deficiency judgment. Just as the foreclosure victims are worried about how they would ever pay tens of thousands of dollars in judgments, the mortgage company is worried about how they would ever be able to collect it and how long the process would take. Foreclosure victims usually go into foreclosure because they lost income, so getting another judgment against them will not help the bank recover any lost profits. In fact, pursuing a deficiency judgment after foreclosure will often prove to be an exercise in futility for both the mortgage company and the homeowners.

Ever further, it will cost the bank more time and money to hire local attorneys to sue their former clients, and then try and collect on the judgment. All of these legal and collections-related expenses are resources expended before the bank can collect even one penny of the debt. Combine this with the fact that they know the homeowners had some financial hardship that caused them to miss their mortgage payments for a number of months, and there is little reason for the bank to believe that the former homeowners will be able to pay the judgment in any time frame that would make it worth it to them. The money that would be used to pursue the deficiency judgment could more effectively be put towards new loans or investments.

So, homeowners almost never need worry about being sued by their bank after the foreclosure, even if the foreclosure laws allow it. The bank could theoretically try to make them pay the balance after the foreclosure auction, but lenders almost never do this. Unless the homeowners were extremely wealthy and owned numerous other liquid assets, the bank will simply move on and allow the foreclosure victims to move on with their lives, as well. This is often the best resolution to the foreclosure for all parties involved. What can happen in theory rarely happens in practice, in the case of deficiency judgments.

There are numerous websites showing the legal and theoretical possibilities of being sued after foreclosure. Many so-called "foreclosure experts" threaten homeowners with the possibility of being sued after foreclosure, and having their wages garnished, cars repossessed, or given enormous tax bills from the IRS. Since so many state foreclosure laws do allow deficiency judgments, there is always the danger of being sued after foreclosure. However, most of the foreclosure advice being given to homeowners is wildly inaccurate. In almost every single case, what usually "actually" happens is...

Nothing.

The bank, after the foreclosure, would have to sue the former foreclosure victims for the deficiency judgment if one even exists. This means the bank would have to hire lawyers, pay attorney fees and court costs, and would simply have a judgment against them. There is no expectation that they would ever be able to collect on that judgment, and banks are aware that homeowners go into foreclosure because they run out of money. So, if they know homeowners have experienced a financial hardship and do not have any money, and the mortgage company has already lost money on the loan due to the foreclosure, there is little reason for them to sue again. They just move on with attempting to sell the property on the open market and recoup some of their losses.

When a homeowner sells the property before the foreclosure and sells it at a lower amount than what is owed on the loan, this is called a short sale, and is one of the most common ways that homeowners can stop foreclosure on their homes. In this case, the homeowners would get a 1099 at the end of the year, since the bank is forgiving the difference in the loan amount. Forgiven debt is counted as income. But this is only a possibility when a homeowner has worked out a short sale with the bank and a buyer, and the home has actually transferred ownership through the short sale.

When the house is sold at sheriff sale for a loss, this is not forgiven debt. It is merely a sale of the house, and homeowners do not get a 1099 if they do not receive any profit from the sheriff sale and if no debt is forgiven. The house is just taken from them to pay the bank and the bank gets the property back because that was pledged as collateral on the original loan. The legal mechanism of foreclosure allows for the sale of the property at a public auction, but has nothing to do with forgiving any portion of the actual debt represented by the foreclosure judgment.

So that is what actually happens in the vast, vast majority of foreclosure situations. Banks rarely pursue deficiency judgments unless they know the homeowners have a lot of cash and other assets that would make it worth suing them. This is not the case in most foreclosures, though. While literally hundreds of online resources and charlatans will threaten homeowners with the possibility of a deficiency judgment and all of its ill effects after foreclosure, the banks themselves are wise enough to recognize that suing their former clients is not in their best interests in all but the most extreme cases. In fact, most lenders would gladly give former foreclosure victims another loan, if they met the qualifications; so there is no reason to turn away future business due to an unfortunate financial hardship that led to the foreclosure.

In most foreclosure situations that end up going to sheriff sale, the house does not sell for as much as the homeowners owe on their mortgage. Frequently, sheriff sale prices are far below the market value and far below the total payoff amount. One reason for this, of course, is the enormous fees, interest, and charges that lenders add to the payoff. However, under certain circumstances, if the house doesn't sell at sheriff sale for the amount that is owed, the lender is able to sue the former owners for a deficiency judgment. The deficiency judgment is usually the difference between the sales prices and the amount that was owed on the loan, plus the regular costs of suing someone.

In reality, though, banks almost never sue their former clients for a deficiency judgment. In all of the time that we have been working with homeowners in foreclosure, no bank has ever sued the homeowners if they lost the house. So, in most cases, foreclosure victims who do not come up with a solution to stop foreclosure do not have anything further to worry about after the foreclosure is over. Most homeowners in this situation are preoccupied with the task of finding a new place to live and repairing their financial lives. But the lenders do not act out of compassion for the homeowners when they decide not to pursue another lawsuit.

This is because it is simply not worth the extra time and effort for the bank to sue for a deficiency judgment when they are aware of the fact that the homeowners went into foreclosure because there was a significant financial hardship that either severely decreased income or raised expenses. Having an extra judgment against homeowners who have gone through the foreclosure process will not get the mortgage company any more money, and it will only cost them more to proceed with the legal process. Foreclosure is expensive and often results in a loss to the bank, and pursuing the deficiency will only contribute to the loss, in most situations.

So the possibility of a deficiency judgment it can be a danger for homeowners living in states where such practices are allowed, but banks rarely sue for the former homeowners. The very circumstances that led them into foreclosure will act to protect them from being sued for even more money. Obviously, this is small consolation to homeowners who have faced financial ruin and are just now beginning to pick up the pieces of their lives, but at least the mortgage company that proceeded with the foreclosure will not stick the foreclosure victims with another negative mark on their credit and another bill that will eventually need to be paid.

Rich homeowners that own many assets and have a lot of cash are in danger of being sued for a deficiency judgment. However, this describes very few actual foreclosure victims, who are often dealing with job loss, medical issues, or the sudden increase in the mortgage payment. These homeowners, who have faced a serious financial hardship, will not be targeted by their mortgage company for an additional lawsuit after the foreclosure process has ended. Of course, this is only because avoiding the deficiency judgment is in the lender's interest, but most homeowners have very little to worry about from their former mortgage company in terms of being sued for the difference between what they owed on the mortgage and what the house sells for at sheriff sale.

One of the questions I've come across most often is "If my home is being foreclosed and the bank takes my home, can they take my car and other belongings, too?"

The short answer is that No, the lender can not take any personal belongings if they take back the home. Because the mortgage loan is secured by the property, the lender only has the right to take the property. And they can only take the house if the correct procedures are followed to foreclose. There are specific state foreclosure laws that must be conformed to in every foreclosure

However, in many cases, the lender can sue you for the difference between the amount the property sells for at the sheriff sale and the amount that you owed on the mortgage. Because properties rarely sell at auction for more than what was owed, this can result in the lender losing tens of thousands of dollars. In order to recover these vast sums of money, the lender can sue you and obtain a judgment against your personal items and belongings. This is called a "deficiency judgment," and is legal in many states, although not all of them allow this practice.

If this is the case, though, with enough work on the part of the lender, they can repossess your personal belongings. In any event, having a foreclosure and a deficiency judgment on your credit report will affect your ability to borrow money far into the future. No creditor wants to give money to someone who has defaulted on loan amounts of potentially hundreds of thousands of dollars. A deficiency judgment coupled with a foreclosure can seriously cripple your ability to get a car loan, personal loan, or new home loan.

Therefore, your very first goal should be learning what options you still have to stop the foreclosure and protect not only your house, but all of your belongings and your earnings. Either stop the foreclosure yourself, or obtain assistance in saving you home.

However, be very careful which foreclosure help companies you deal with or trust. Because of the nature of the foreclosure situation and the potential for desperate homeowners, a vast number of criminals and other "sharks" operate in the foreclosure industry. Unfortunately, the help these companies or individuals provide can leave you in a much worse situation than you are in now. Consulting our foreclosure scam page will give you some basic tips for preventing being taken advantage of.

That's why we recommend you do whatever you can to stop the foreclosure yourself by whatever way possible. If you can not or are unwilling to attempt to save your home on your own, then search for either government programs or other free foreclosure help programs.

So, your lender can not directly take your personal belongings in a foreclosure, but they can sue you outside of the foreclosure for an extra judgment to be placed against you. Hopefully you will be able to avoid the foreclosure and keep, not only your car and other items, but, most importantly, your home.