Thursday, September 9, 2004

Do You Have to Pay the Bank After a Foreclosure?

A home foreclosure can be a traumatic experience for a homeowner, but it may not be the end of his money troubles. A homeowner who has just seen his home auctioned off to the highest bidder can still owe money to his former mortgage lender. The bank or other lender may pursue him in court for money owed, further damaging his credit and digging him a deeper financial hole.

Foreclosure Auction

    Once right of repossession is granted by a court or through a nonjudicial procedure, your former lender is required to sell your home through an advertised public auction. The buyer at auction generally pays cash, which guarantees the bank gets paid right after the bidding. If bids are inadequate, the property could become part of the bank's Real Estate Owned (REO) portfolio. If the bank accepts the auction price of the home as "payment in full," you do not owe it any additional money.

Deficiency Judgment

    If the auction price of your former home is insufficient to cover what you owe the lender, you may owe the difference, called a deficiency judgment. Your lender basically sues you to recover the balance. This method of debt collection is not legal in all states, so it's important to know the foreclosure laws in your state or risk being blindsided by a civil suit on top of a foreclosure.

Second and Third Mortgages

    If you've taken out a second or third mortgage on your home, you may owe the full amount of those loans after your home is sold, according to Real Estate Online's website. Laws protecting you from a deficiency judgment on your first mortgage lien offer no such protection for other mortgages. This means the other lenders can sue you to recover your other mortgage debt after a foreclosure.

Avoiding a Lawsuit

    According to Real Estate Online, you can try to convince your mortgage lender to waive the right to pursue you for a deficiency judgment. You can accomplish this by agreeing to declare the difference on your mortgage as income, which is declared using IRS Form 1099. Your mortgage lender can either sue you for the difference on your mortgage or issue you a 1099 -- not both.

Bankruptcy Protection

    Another means of expunging any debt owed to the bank after a foreclosure is through bankruptcy. Filing for Chapter 7 bankruptcy can expunge your unsecured debts, including the remainder of a home loan, according to Financial Newsline's website. Since the debt is no longer secured because the bank sold the home, it is not exempt from Chapter 7 bankruptcy rules and may be expunged just like credit card debt. It's important to note that Chapter 7 bankruptcy may require you to liquidate other assets like a car to pay down a portion of your debts before the remainder is expunged by the court.

Government Protection

    Certain states across the country, like California, are moving to eliminate deficiency judgments and other lawsuits by banks to recover the difference in a mortgage resulting from a foreclosure. According to the Foreclosure Law Firms website, over 40 states in the U.S. have some form of law which bars a bank from suing a borrower to recover the mortgage deficiency or requires them to obtain court approval before commencing with any civil action to recover.

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