Deficiency Judgement

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A dificiency Judgement can be a homeowners worst nightmare.
After a Short-Sale or Foreclosure auction is finalized, the primary lien holder receives all proceeds from the sale. In the event the sale satisfies the primary loan, other secondary lien-holders are then paid off and all debt is eliminated. When the sale does not generate enough money to pay off the primary loan, the deficit amount is called a deficiency. Depending on the state where the property is located and on the promissory note contained in your loan package, the lien-holder may opt to get a Judgement in the amount of the deficiency against you, the borrower. This action is called a "deficiency Judgement". A Recourse Clause on the loan, the foreclosure laws of the state where the property is located and other variables specific to your case will determine if a lender has the power to pursue this Judgement.

Final Judgement
Throughout the pre-foreclosure and post foreclosure processes, the lender accrues legal fees and expenses which will be added to the deficiency judgement along with the unpaid balance of the loan, accelerated interest payments, etc. Generally, the "Final Judgement" is approved by the court after the property is sold or after a professional appraisal is completed to estimate the lender's loss. In states where a Final Judgement can be based on an appraisal, the homeowner can dispute the appraisal if he or she does not believe the appraisal is accurate. In the event the appraisal is proven high, the deficiency Judgement may be lowered to accommodate the new deficiency amount.

Before Filing
Prior to filing a deficiency Judgement against a borrower and his or her co-signers, the lender will take into consideration the credit status, outstanding debt and overall finances of the individuals involved and whether they believe the debt can be collected, as there are costs involved in pursuing a Judgement. The lender may also request a NWS or "Net Worth Statement" from all borrowers to identify their assets. This document is yet another tool used by the lender to determine the feasibility of a deficiency Judgement. When the borrowers have no assets, usually the lender opts against a deficiency Judgement and simply reports the deficiency loan amount to the IRS via form 1099. A 1099 is a form that identifies an income which requires the payment of income taxes. Therefore, when the lender submits this form to the IRS, the homeowner with have a phantom income reported and will be responsible for the payment of income taxes. When however the property in question is the primary residence of the borrower or borrowers, as of December 2007, legislation was enacted that permits this homeowner, a maximum exemption on the income reported in the lender's 1099.

Again, take charge of your situation by carefully evaluating your rights based on your security document and state laws and make the best decision for you and your family. Remember to consult a local attorney to further evaluate your options.