Can a Mortgage Company Collect the Difference in a Foreclosure?

Foreclosure can be a traumatic experience, and it doesn't necessarily end when the lender takes the home. Your house will be sold at auction, with most states allowing the bank to file a lawsuit against you for any difference between the mortgage balance and the sales price at auction.

Deficiency Judgments

Many people assume their foreclosure is over once the bank takes the property. However, serious repercussions could remain, with laws in more than 30 states allowing mortgage companies to seek court judgments to collect any remaining balance after foreclosure. A legal order called a deficiency judgment is signed by a judge if the mortgage company wins its lawsuit. Example: The balance on your mortgage at the time of foreclosure is $150,000. The home sells at auction for $85,000. The mortgage company files a civil lawsuit against you for the difference---$65,000. A judge sides with the mortgage company and signs a deficiency judgment ordering you to pay the money.

Collecting The Judgment

After winning the lawsuit the mortgage company can ask the court for the right to garnish your bank account or wages. This can result in regular payments being deducted from your paycheck and your bank accounts until the judgment is paid. Employers and banks must comply with the court orders. Your employer will notify you about the garnishment, but banks are not required to notify you that your checking or savings accounts have been garnished.

Filing For Bankruptcy

Many people file for bankruptcy after receiving large deficiency judgments. The judgment is considered an unsecured debt, meaning there is no collateral backing the amount owed. The unsecured status means the judgment could be eliminated, or discharged, through Chapter 7 bankruptcy in just a few months. However, all of your debts must be included in the bankruptcy. Another form of bankruptcy, Chapter 13, requires a payment plan of three to five years, based on your income. After that period all unsecured debts, including the judgment from the foreclosure, will be eliminated. Chapter 7 has income limits that vary by the state, and generally only those with low incomes will qualify. Others can choose Chapter 13.

Good Legal Advice

Hiring an experienced real estate attorney could help you avoid having a mortgage company collect from you after foreclosure. First, the attorney can tell you if laws in your state allow mortgage companies to sue after foreclosure. Without the right to sue, the companies are powerless to collect from you. If the laws do exist in your state, the real estate attorney can negotiate an alternative to foreclosure, including a signed agreement from the bank that it will not pursue legal action. Alternatives such as short sales and deed-in-lieu of foreclosure can include promises not to sue. Short sales allow your house to be sold for less than the balance remaining on the mortgage. A deed-in-lieu of foreclosure allows you to voluntary surrender the house to the lender with no further obligation.