It is possible that your paycheck could be garnished as a result of a foreclosure, but if it happens at all it could take years to begin. CNN reports that losing a home to foreclosure doesn't necessarily end your financial responsibility for the mortgage. In most states, banks and mortgage companies can file lawsuits to recover money lost when selling foreclosed homes at auction. Such a lawsuit could lead to a court judgment and garnishment of your paycheck.
Foreclosure Auction
Foreclosed homes sold at auction are often sold for less than the remaining balance on the mortgage. Example: Your house is foreclosed with a mortgage balance of $125,000, but is sold at auction for $100,000. That creates a $25,000 loss for the mortgage company. If the laws in your state allow it, the mortgage company can demand that you pay the $25,000 difference.
Deficiency Judgment
The remaining balance on the mortgage becomes an unsecured debt, allowing the mortgage company to file a lawsuit in seeking what is known as a "deficiency judgment." The deficiency judgment is the difference between the mortgage balance and the sales price at auction. A court hearing will be set but the process is usually an easy victory for the mortgage company. Illinois Legal Aid reports that creditors and debt collectors always win debt lawsuits if they can prove that the debt is valid and you owe it.
Garnishment Proceedings
A judge will hear the case and either dismiss the lawsuit or grant the deficiency judgment. If you receive a judgment and refuse to pay, the mortgage company can request garnishment of your paycheck through a court order signed by the judge. A certain percentage of your check would be sent to the mortgage company each payday until the judgment is paid. CNN reports that banks and mortgage companies sometimes wait several years before suing over a mortgage foreclosure. The reasoning is that after a few years your finances may have recovered and you may be in a better position to pay the judgment without the threat of garnishment.
Legal Advice
The threat of a lawsuit -- even several years later -- is a key reason why you hire a reputable real estate attorney during your foreclosure. You may be focused on simply giving the house up and getting on with your life, but the attorney can advise you if laws in your state allow the mortgage company to come after you later. In some instances the attorney may secure a written guarantee that the bank or mortgage company will not sue you.
Settling Out Of Court
The mortgage company may agree to a settlement on the remaining balance rather than sue. Debt settlement allows unsecured debt to be resolved for less than the full balance. Settlement agreements can vary widely but usually are for 25 to 75 percent of the balance. A real estate attorney can handle negotiations for you and help avoid garnishment of your paycheck.
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