Does a Foreclosure Forgive the Debt?

If you fall behind on your mortgage payments, your lender will likely send you letters and make phone calls to urge you to bring your mortgage account current. Continuing to miss mortgage payments can place you at risk of default. If your mortgage company considers your account in default, it may take aggressive action against you, including foreclosure, which is the process of selling your home at an auction to recover the lenders' losses. Sometimes, foreclosure may not forgive the entire balance of your mortgage loan.

Deficiency

A lender that forecloses on a real estate property is not required to sell the home at an auction price equal to or greater than your loan balance. Depending on investor demand for your home, it may sell for substantially less than what you owe on your mortgage loan. If this happens, the difference between your balance and the sale price is called a deficiency. Your mortgage company will hold you responsible for the deficiency after the foreclosure sale.

Foreclosure Costs

Foreclosure is an expensive process for mortgage lenders -- they must pay attorney fees, court costs, appraisal fees and auction costs in order to legally sell your home at a foreclosure auction. After the winning bidder has purchased the foreclosed home, your mortgage lender will seek recovery of these costs from you.

Judgment

The mortgage lender may send you letters and make telephone calls to compel you to pay the mortgage deficiency and foreclosure costs. If you do not attempt to pay these costs voluntarily, the lender may file a lawsuit against you in your county or district court. The court will typically issue a judgment in the lender's favor, which provides a legal confirmation that you are responsible for the debt.

Post-Judgment Action

In most states --- except for North Carolina, South Carolina, Texas and Pennsylvania --- a judgment permits a creditor to take part of your wages through garnishment to pay a judgment debt. Typically, the mortgage lender may garnish up to 25 percent of your earnings after taxes to pay deficiency and foreclosure expenses. Depending on your state's laws, a lender with a valid judgment may also garnish your bank account balances, place a lien on your home and sell your non-exempt personal assets to recover what you owe.