There are a few key rules about foreclosures that vary from state to state. One of these is whether mortgages are considered recourse or nonrecourse. This refers to whether the borrower is personally liable for the loan (in which case it is called recourse) or not (in which case it is called nonrecourse). Florida is one of the so-called "recourse" states. A lender can go after the borrower's other assets and income to recover any mortgage debt not repaid through the foreclosure sale.
A deficiency judgment is a court judgment against a borrower for the difference between the value of a home at foreclosure and the borrower's outstanding mortgage debt. A deficiency judgment is the manner in which a lender goes after a borrower who has a partially unpaid debt after foreclosure. Most states allow deficiency judgments, although many put limitations on them. In California, for instance, a lender can only go after mortgages that were taken out in a refinance and even then must conduct the foreclosure judicially—in court—which is not the common method of processing a foreclosure in that state. In Florida, there are no limitations on deficiency judgments.
The foreclosure process itself is considered either judicial or nonjudicial. State law in Florida requires a judicial foreclosure process. The law also allows a lender to wrap a deficiency judgment into the foreclosure process and to come back anytime up to five years later to file a separate action in court for a deficiency judgment. If the lender includes the deficiency judgment in the foreclosure process, it must include the deficiency as part of the initial complaint, must have the complaint personally served on the borrowers and must bid an amount equal to or less than the value of the property at the foreclosure sale.
Some types of bankruptcy may protect you from a deficiency judgment. There are a number of different types of bankruptcies, each of which has a separate process and different repercussions. Some bankruptcies also may have an effect on the foreclosure itself. It is therefore important to consult an attorney at the beginning of a Florida foreclosure so that you file the right type of bankruptcy petition at a time during the process that will benefit you the most.
Just because a lender has the right to pursue the unpaid balance associated with a recourse loan through a deficiency judgment doesn't mean it will. Because there are costs and sometimes bad press associated with deficiency judgments, some lenders simply write off their loss. If a lender does this, you will be off the hook for the unpaid debt but may be on the hook for taxes. The IRS considers unpaid debt to be income and therefore subjects it to taxation as ordinary income. The Mortgage Forgiveness Debt Relief Act of 2007 allows homeowners to exclude foreclosure-related forgiven debt from their income so long as the foreclosure occurred between 2007 and 2012 and was of a personal residence.