What is a loan deficiency?
A loan deficiency or deficiency is the amount by which the loan amount exceeds the value of the property
What is a deficiency judgment?
A deficiency judgment is what a lender may seek following a foreclosure sale where the property is sold for less than the amount of debt owed on the property.
For example, where a lender is owed $300,000.00 on a piece of property, forecloses on that property and sells the property for $200,000.00, the lender may seek a money judgment in the amount of $100,000.00.
Once a lender has a money judgment, they could garnish wages, garnish bank accounts, or attach assets to satisfy the judgment. In Florida, a judgment could stick on ones record for 20-years.
A deficiency judgment could also by sought years after a short sale has been completed. Many people mistakenly believe that a lender’s agreement to accept the proceeds from a short sale, lets the borrower off the hook for any the deficiency. However, this is typically not the case. Most lenders do not waive their right to purse a deficiency or later suit on the promissory note itself.
In fact, when a lender asks for updated personal financial information in order to determine whether or not to approve a short sale, such a request by the lender is merely a fishing expedition to gauge whether or not to pursue a deficiency judgment.
In this market, many of the institutional lenders are simply selling the opportunities to pursue deficiency judgments to collection companies. When a lender sells the opportunity to pursue a deficiency judgment to a third party, such a third party purchaser will likely pay the lender much more for the opportunity to collect on a deficiency judgment where the lender also provides a recent financial statement from the hapless borrower. IN SUCH MATTERS, OBVIOUSLY, IT IS IMPORTANT TO HAVE AN ATTORNEY.
Want to avoid a deficiency judgment?
After the foreclosure has taken place, the borrower has very little leverage to prevent a deficiency judgment. The time to try to avoid a deficiency judgment, is prior to and during the foreclosure case. A foreclosure suit is a real lawsuit. You need a real estate attorney, preferably an attorney with both real estate and banking experience.
Many borrowers are misinformed and make the mistake of not responding to the foreclosure suit after being served. You must respond. A well-planned response may provide the leverage you need to avoid a deficiency judgment. Again, it is important to have an experienced attorney on your side.