In many states, banks can sue you after your home is foreclosed on, and they can wait several years before doing so. That can be a huge shock for people who mistakenly thought losing their home to foreclosure meant the end of their financial responsibility. Some states, such as California, have laws against post-foreclosure lawsuits, but CNN reports that as of 2010, more than 30 states allow the lawsuits, including Florida, Texas and New York.
Deficiency Judgment
Laws in some states allow banks to file a civil lawsuit against you if your home is foreclosed on and sold for less than the balance on the mortgage. The lawsuit can lead to a so-called "deficiency judgment," with a judge ordering you to pay a specific amount of money to the bank. For example, the balance on your mortgage was $200,000 at the time of the foreclosure, but because of declining property values, the market value of the home was just $125,000. The bank sells the home at auction for $90,000, leaving a balance of $110,000 remaining on the mortgage. The bank then files a lawsuit against you seeking a deficiency judgment for $110,000.
Bankruptcy
Many people with large deficiency judgments are forced into bankruptcy. The foreclosure suggests the homeowners were already struggling financially, and the deficiency judgment serves as a double blow. The judgment becomes an unsecured debt, which can be eliminated through Chapter 7 bankruptcy in just a few months. However, all debts must be listed in the bankruptcy, and generally only people with low incomes qualify for Chapter 7. Others can choose Chapter 13, another popular form of personal bankruptcy, which requires payments to your creditors for three to five years. After that, any remaining unsecured debt, such as the deficiency judgment, will be eliminated by the bankruptcy.
Timeline
Some banks or their collection agencies will wait years before filing a lawsuit, CNN points out. It's a strategic move by the bank. By waiting a few years before filing suit, the bank is hoping that your financial situation will have recovered, making it easier, possibly, for you to pay the deficiency judgment and not file for bankruptcy. Individual state laws vary, but CNN notes that in Florida banks can wait five years to file suit. Then, after being granted a judgment, the bank has 20 years to collect.
Legal Advice
The possible threat of a lawsuit makes it imperative that you seek advice from a reputable real estate attorney during the foreclosure process. The attorney can tell you if the laws in your state allow such lawsuits. Even if lawsuits are allowed, the attorney can check your mortgage to determine if any other factors would prevent you from being sued. For example, the presence of a second mortgage or other liens on the home may make it difficult for the bank to sue without the cooperation of the other lien holders.
Negotiations
Deficiency judgments, like other judgments, can be negotiated and settled for less than the full amount. Your attorney can negotiate directly with the bank on your behalf.
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