Deficiency JudgmentsBeing 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' LiensOther 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.