Can Banks Garnish Wages for a Short Sale?
An increasing number of short sales in 2011, as reported by the National Association of Realtors, presents challenges to homeowners. Due to economic conditions, some financially distressed borrowers sell their home for less than what they owe in what is known as a short sale, which requires lender approval. As a result, the bank, mortgage lender or servicing company may pursue the borrower for its losses through wage garnishment. In certain cases, federal law offers some protection.
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The Basics
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After the short sale of a home, the lender may sue the borrower for the deficiency. The deficiency amount is the difference between the amount still owed on the loan and the amount the bank recouped from the short sale proceeds. Wage garnishment requires a court order for the employer to legally deduct from the employee's earnings to satisfy the deficiency judgement. Wages can be garnished from employees that earn "salaries, commissions, bonuses and income from a pension or retirement program," according to the Department of Labor. In non-deficiency states -- states that don't allow deficiency judgments -- the lender may still sue for some debts, such as loans not used to purchase the home originally, home equity loans and lines of credit tied to the property.
HAFA Provisions
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In 2009, the federal government implemented the Home Affordable Foreclosure Alternatives (HAFA) program to help struggling homeowners avoid further damage to their credit and finances after a short sale. The alternatives of settling a delinquent mortgage account with a short sale or deed-in-lieu of foreclosure -- which reverts ownership of the property to the lender -- are available to eligible borrowers until the end of 2012. A lender may not garnish wages after an HAFA short sale. A main provision of the program requires the lender to fully release the borrower from any future liability, including a deficiency judgment.
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Wage Garnishment
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Lenders may not garnish tips or self-employment income after a short sale. The maximum amount they can garnish depends on the state in which the borrower is employed and the Consumer Credit Protection Act, a federal law that governs wage garnishment. The act also prohibits employer's from firing the employee due to garnishment of only one debt. In states where wage garnishment law differs from federal law, "the law resulting in the smaller garnishment must be observed," states the Department of Labor.
Considerations
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HAFA applies only to mortgages in first-lien position originated before 2009. The lender may pursue a deficiency judgement and wage garnishment on second mortgages and home equity lines if the borrower or property is ineligible for a HAFA short sale. Second homes or investment property as well as homes with loans exceeding HAFA loan limits are ineligible for protection. The Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), Freddie Mac and Fannie Mae have their own versions of HAFA. Although the anti-deficiency rule remains the same for all HAFA programs, other provisions and requisites may vary by loan type.
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References
- U.S. Department of Labor: Wage Garnishment
- Realtor.org: Home Affordable Foreclosure Alternatives Program (HAFA)
- Realtor.org: Who Is Eligible For HAFA?
- U.S. Department of Labor: Fact Sheet #30: The Federal Wage Garnishment Law, Consumer Credit Protection Act's Title 3 (CCPA)
- Realtor.org: The Basics: Short Sales
