After a Foreclosure, Can the Bank Collect the Difference?
When you default on your mortgage loan the bank's legal remedy is to foreclose on your home. This process involves the bank selling your home at a public auction to the highest bidder. Sometimes the high bid does not produce enough money to satisfy the outstanding balance on your mortgage loan. The excess balance is called a deficiency and in some states the bank is authorized to collect the deficiency from the borrower.
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States Vary
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Each state has its own set of foreclosure laws, therefore you will have to check the laws in your state. Some states, such as Utah, allow mortgage lenders to pursue a deficiency judgment against the borrower, as long as they file the lawsuit within three months after the foreclosure sale. Other states, like California, generally do not allow the mortgage lender to collect a deficiency if the mortgage was on the borrower's primary residence.
Market Value
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Calculating the exact amount of a deficiency can be a challenging task because in most states a deficiency is based on the outstanding mortgage balance less the market value of the home at the time of the foreclosure sale. The deficiency is not actually based on the amount the home sold for at foreclosure. Proving market value at the time of the foreclosure sale is not an exact science, as it often requires a trial involving a real estate appraiser as an expert witness.
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Deficiency Judgment
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If the laws of your state allow lenders to collect the difference, then the lender will attempt to obtain a deficiency judgment against you. A deficiency judgment is an order signed by a state court judge which provides that you must pay the lender a certain amount of money. In order to obtain a judgment, the lender will have to file a lawsuit against you and, if you challenge that lawsuit, will have to win at trial.
Judgment Collection
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The lender's struggle to collect a deficiency does not end when the lender obtains a deficiency judgment. At that point, the lender must attempt to collect on the judgment. State laws allow for various ways of collecting on judgments, including seizing property or bank accounts, or garnishing wages and income. If you have a significant deficiency judgment looming in your future then, with the advice of an attorney, you may want to consider bankruptcy as an option to avoid liability for the deficiency amount.
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