One of the most distressing things that could happen to a person is losing their home. Many people lose sleep at night worrying about what they would do should they fail to keep up with their mortgage payments. Yet losing your home is only the most obvious negative outcome. It is possible that you could lose your home and still have to make payments on what was owed.
When this happens, it is called a deficiency judgment. Unfortunately, they are more common than people realize, so we’re taking the time to educate you on the process. We’ll look at what a deficiency judgment is, how they come about, and how one could affect you. Then we’ll look at what can be done to try to avoid a deficiency judgment in the first place.
What is a Deficiency Judgment?
Before we can explain what a deficiency judgment is, we need first to understand what a deficiency is. The best way to do this is through an example.
Say you buy a home worth $200,000. You make a down payment of $20,000; then you manage to pay off another $20,000 before you run into money troubles. The home is foreclosed on with $160,000 left on the principal balance. Unfortunately, due to a turbulent market, they can only sell the property for $140,000. This would leave a deficiency of $20,000.
The lender would then have to take steps to get a deficiency judgment against you. In some cases, they may simply not consider the difference worth pursuing. This is often the case when the deficiency is minimal. But they almost certainly will if the amount is worth taking action to recover. That means they would have to provide the proper notice and initiate a lawsuit.
The outcome of that lawsuit, if it is in the lender’s favor, would be a deficiency judgment. It is a judgment that would require you to pay the deficiency amount. A lawsuit must be filed within two years of the sale from which the deficiency arose; however, once a deficiency judgment is made, Massachusetts law allows the lender a twenty-year period to collect the dues on a deficiency judgment.
One way around foreclosure may be to make use of a short sale. A short sale is a type of real estate transaction where a mortgage holder allows a homeowner to sell the property to a third-party buyer. A short sale is less negatively impactful than a foreclosure, but it must be handled very carefully. A short sale could still result in a deficiency judgment against you unless you take steps to protect yourself from such a possibility.
How Would a Deficiency Judgment Affect You?
While a deficiency judgment can be devastating, it does not mean that you are required to pay everything you owe immediately. If you had that kind of money to begin with, then there wouldn’t have been a problem in the first place. You will be required to pay back the amount, but you should be granted a reasonable amount of time to do so. Issues primarily arise when people decide to ignore a deficiency judgment.
When you ignore a deficiency judgment, several actions could be taken against you, such as some form of garnishment or a judgment lien against your personal property.
Garnishment may occur in two key ways. The first is wage garnishment. Basically, some percentage or amount would be taken from each paycheck in order to repay the lender. Wage garnish does not reduce how much you earn. It simply reduces how much of what you earn is handed over to you.
Another form of garnishment that could be used is to garnish your bank accounts. Some people try to avoid wage garnishment by working under the table and trying to hide how much they earn. Garnishing a bank account would prevent this by taking directly from the bank account. Ultimately this means that it treats what is in your account as yours. This can be problematic should you be holding onto funds that belong to another person.
A judgment lien against a piece of your personal property would give a creditor the right to take possession of that property for purposes of recovering what is owed to them.
What Options are Available for Avoiding a Deficiency Judgment?
There are a few options that can help you to avoid a deficiency judgment. First, it is highly recommended that you seek legal representation. For one, legal representation can help to make the whole situation a little less scary by providing you with detailed information on what to expect and what options are the most attractive based on your situation.
But another reason that legal representation is recommended is that many lenders don’t follow the proper protocol regarding legal obligations, such as providing notice before foreclosure or initiating the lawsuit itself. An attorney may be able to spot something that was done wrong and prevent a judgment.
In addition, a lender may see that you have sought legal representation and consider the amount owed not worth the trouble. When you hire an attorney, you are telling the lender that the collection process will be more complicated than they would like it to be. Sometimes all it takes to avoid a deficiency judgment is to make it clear to the lender that you will fight against it with everything at your disposal.
Finally, depending on your financial situation, filing for bankruptcy may be a good idea. This would trigger federal protections that can help you avoid paying a deficient judgment.
When Should I Approach an Attorney?
An attorney can assist throughout any step of this process, from the first notification of foreclosure to fighting against a deficiency judgment. An experienced attorney will be able to provide you with answers, suggestions, and representation that could help you to avoid the worst-case scenario. Don’t wait until it is too late; reach out to a qualified attorney today.