<strong><a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/" target="_self">Do you know what a Deficiency Judgment is and how it could harm you financially?</a> <a href="http://h4hconsulting.com/cms/wp-content/uploads/2010/06/strategic_default_image1.jpg"><img class="alignright size-full wp-image-206" title="strategic_default_image" src="http://h4hconsulting.com/cms/wp-content/uploads/2010/06/strategic_default_image1.jpg" alt="" width="150" height="150" /></a>
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A<a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/"> <strong>deficiency judgment</strong></a> is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full. The availability of a deficiency judgment depends on whether the lender has a recourse or nonrecourse loan, which is largely a matter of state law. In some jurisdictions, first mortgages are non-recourse loans, but second and subsequent ones are recourse loans.

States that follow the title theory of mortgages typically allow non-judicial foreclosure procedures, which are fast, but do not allow deficiency judgments. States that follow the lien theory of mortgages require judiciary foreclosure procedures, but allow deficiency judgments against the debtor.

Deficiency judgments are court orders that make you personally liable for unpaid debt. They are often associated with foreclosures, when a home's selling price is not enough to cover the loan balance. Let's take a closer look at what deficiency judgments are and if you should expect one.

<a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/"><strong>Deficiency Judgment Overview</strong></a>

When you default on a loan and the lender repossesses your property, the value of the property may not pay off the loan. For example, you might owe $100,000 on your home, but it only sells for $80,000. You're $20,000 short.

Because the lender wants <em>all</em> of the money back, they may take further legal action against you. Legal action to collect the remaining amount is called a deficiency judgment.

<a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/"><strong>Deficiency Judgments</strong></a>

A deficiency is the difference between the fair market value of the property and the amount received, providing the amount received is less than the amount owed.

Whether the bank can pursue a deficiency judgment after a foreclosure or short sale depends in part on whether the promissory note makes the seller personally liable for the debt. Some states allow for personal liability.
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<h1><a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/">Deficiency   Judgments in Florida</a></h1>
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<td>If your property is sold in a Florida judicial foreclosure and the sale     price is less than the actual amount owed, you will be responsible for     paying the deficiency. The lender can either forgive this deficient amount     or come after you to recover it.
<h3><a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/">Can lenders get deficiency judgment     Florida?</a></h3>
Yes! The lender can obtain a judgment     against you to recover the deficiency. He has to file a separate     motion/lawsuit for a deficiency once the foreclosure sale is complete.     The court then holds a hearing to decide if a deficiency judgment can be     allowed against you. At the hearing, the lender has to prove that the     property value is indeed less than what you owe.

As a borrower, you have the right to oppose your lender's claim for     judgment. You will have to prove that the property is worth more than the     outstanding mortgage balance at the time of foreclosure. You can use an     appraisal or the tax assessed value of the property to support your claim.
<h3><a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/">What happens after lenders get judgment?</a></h3>
Deficiency judgment in Florida allows     lenders to come after your wages, levy your bank accounts and put liens on     your other properties. However, there are certain assets which are exempt     from judgments. They include IRA, 401k, other retirement accounts, social     security income, unemployment benefits, workers compensation, etc. Your     lender has the right to collect on that judgment for 20 years. The interest     will accrue every year till it is paid in full. Apart from this, the     judgment will show up on your credit report for 7 years and will affect     your credit scores adversely.
<h3><a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/">Are your wages exempt from garnishment?</a></h3>
If you are the head of the family     and your net wages are less than $500 per week, you can protect your wages     from garnishment. But if you've signed any document allowing the wage     garnishment, the lender can come after your wages. In case you are not the     head of the family, you can still protect a certain part of your wages.     Federal law limits the amount of money that can be garnished by your     lender. They can take only 25% of your net wages or the amount in excess of     30 times the federal minimum wage per week, whichever is less.
<h3><a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/">Are homestead properties exempt from     deficiency judgment Florida?</a></h3>
No. Homestead properties are not     protected from judgments for mortgage liens. You can protect your home from     creditors of unsecured debts under homestead protection. But lenders who     have financed purchase, repair, improvement, etc. of your home, hold a lien     on your property. If you default on such secured loans, your home is not     protected from judgments.
<h3><a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/">Does PMI help you cover the deficiency?</a></h3>
No. Private Mortgage Insurance (PMI)     cannot protect you from deficiency judgments. It is meant to protect a     lender against the losses from a mortgage default. A PMI is required if you     make a down payment of less than 20% on your loan.
<h3><a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/">Is there a way to avoid deficiency     judgments?</a></h3>
Yes. If you can stop foreclosure, you can     avoid the judgment. In case you're having difficulty in making mortgage     payments and a foreclosure is imminent, you can look for various loss mitigation     options like loan modification, deed in lieu (DIL), etc. A loan     modification can reduce your mortgage payments and help you save the home.

A deed in lieu does not help you retain the home. But it waives off the     lender's right to collect the deficiency. This helps you avoid a judgment.     However, you should not believe in verbal agreements. If the deficiency is     forgiven, ask your lender to give it in writing before you proceed with the     deed in lieu.</td>
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<td width="90%">Many Florida real estate investors   are concerned about personal liability from mortgage foreclosure deficiency   judgments. Although they accept loss of equity, if any, in property which is   foreclosed by their mortgage lender, people are afraid of a deficiency   judgment. A deficiency judgment refers to a mortgage lender’s judgment   against the borrower for the difference between the outstanding balance of   the mortgage note, plus costs and attorneys fees, and the value of the   property foreclosed. The property value is determined on the date of the   foreclosure sale. Personal liability from mortgage debt is today a principal   reason for asset protection planning.

In judicial foreclosure states, a mortgage foreclosure does not automatically result in a   deficiency judgment. Just because you lose a property at foreclosure does not   mean you will remain personally liable for money owed to the lender. To   obtain a deficiency judgment against the borrower the foreclosure sale the   mortgage lender has to file a motion for a deficiency after the foreclosure   sale, and the court must hold a separate evidentiary hearing on the lender’s   request for deficiency liability. At the evidentiary hearing the mortgage   lender has to show the court evidence that the property’s value on the sale   date was less than the note balance. The borrower can get his own appraisal   or can use the government's tax assessed value as evidence of value. If the   property was worth more than the note balance on the sale date the court will not   give the mortgage lender a deficiency judgment against the borrower. The   borrower may present evidence of value in the form of a formal appraisal or   other less formal opinions of value such as the local government's tax   assessed value.

<a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/"><strong>How has the economy affected judgments?</strong></a>

During the recent real estate boom deficiency judgments were uncommon because   increasing real estate values brought home values above note balances of   defaulting mortgages. Additionally, lenders could take back "upside   down" properties and hold them until the rising market made them whole.   Deficiency liability is a problem in a declining market. Up to this point in   the real estate crash few mortgage service companies with conventional first   mortgages have been pursuing deficiency judgments, especially mortgages on   owner occupied homes. Many attorneys and other experts speculate that first   mortgage deficiency lawsuits will increase in the future as lenders resolve   foreclosure backlogs and as they sell their deficiency rights to third party   investors and collection firms. Florida law gives mortgage lenders five years   to pursue a mortgage deficiency claim.

<a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/"><strong>What about Second Mortgages and Private Lenders?</strong></a>

Second   mortgage lenders and private lenders are more likely than first mortgage holders   to go after the borrowers by suing for default on the underlying promissory   note. There has been a significant increase in second mortgage lawsuits since   the beginning of 2009. Banks that made commercial loans to developers or   builders almost always file a lawsuit against the individual borrower to enforce   and collect upon the promissory note or personal guarantee of a business   loan.

<a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/"><strong>What do I do if the file a Deficiency Judgment?</strong></a>

If a   mortgage lender pursues a deficiency judgment you should hire an attorney to   defend the deficiency. In many cases, an attorney can use procedural defenses   and substantive lending law to defeat a deficiency claim and the attorney can   negotiate an acceptable settlement for much less than the total deficiency   liability in most cases.

<a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/"><strong>How do I avoid a Deficiency Judgment?</strong></a>

One way to avoid deficiency liability, or to modify your   mortgage to avoid foreclosure, is court ordered mediation with your mortgage   lender through a new mediation program in Chapter 13 bankruptcy cases. If you   file a Chapter 13 bankruptcy in the Orlando division the federal bankruptcy court   will very soon after filing issue an order requiring the lender to   participate in good faith mediation to discuss mortgage modification.

<a href="http://h4hconsulting.com/cms/faq/how-will-a-deficiency-judgment-impact-me/"><strong>What about Income Taxes?</strong></a>

Another problem with mortgage foreclosure is possible income tax   consequences. The general rule is that when a lender forgives or cancels a   debt the borrower can incur income tax on the amount of debt forgiveness.   When you arrange a discount in your mortgage in order to sell your house (a   so-called "short sale") the mortgage lender will cancel part of   your mortgage debt and you will receive a tax form 1099 telling the IRS that   you have imputed income for the amount of debt reduction. You will also incur   income tax liability for a deed in lieu of foreclosure. The taxable income   will be the difference between the property value and the balance of the   mortgage loan on the date you surrender the property to the bank.

A foreclosure may result in cancellation of debt income depending on whether   the bank pursues a deficiency judgment. If the mortgage lender gets a   deficiency judgment for the difference between the property value on   foreclosure sale date and the mortgage balance the lender is not forgiving   any part of the loan. If the bank chooses not to pursue a deficiency   judgment, or pursues the judgment unsuccessfully, the borrower may incur   income tax liability for debt forgiveness.

In   December, 2007, Congress acted to protect many debtors from income tax   liability associated with foreclosure avoidance. The Mortgage Forgiveness   Debt Relief Act of 2007 states that homeowners will not be subject to income   tax from release from mortgage liability if and to the extent the mortgage   proceeds were used to <strong>buy or </strong>improve<strong> </strong>their primary residence. There is   no income tax shelter from forgiveness of mortgage debts for investment   property, vacation homes, or mortgages used for businesses or to pay off   credit card balances. The protection expires in December, 2012. You should   speak with an attorney or CPA familiar with the new law to see if you qualify   for income tax protection.

For those borrowers who do not qualify for protection of the new Act there is   an insolvency exception to imputed income from the cancellation of mortgage   debt. If a borrower is financially insolvent when he surrenders the mortgaged   property to the lender voluntarily or through foreclosure there will be no   imputed income. A borrower who files bankruptcy is presumed to be insolvent,   so that a bankruptcy debtor cannot suffer imputed income tax liability   because the bankruptcy discharges personal liability under a mortgage note.   More information is available from IRS Publication 908 and IRS tax form 982.   Both forms can be found at irs.gov.

The tax law permits many real estate investors to offset   imputed debt forgiveness income with corresponding tax losses. For example,   if a lender forecloses on a parcel of income producing rental property the   taxpayer may be able to report an operating loss to offset all imputed income   from debt forgiveness in the same year that the mortgage lender issues the   Form 1099. When a foreclosed property was not income producing, but was held   solely for future appreciation (example: vacant land), the deduction from   ordinary income of capital losses in excess of capital gain may be limited to   $3,000 per year so that the total loss will have to be deducted over future   tax years. You should consult your CPA to determine the tax impact of a   mortgage foreclosure on your tax situation. The tax impact of foreclosure is   not a legal issue.</td>
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<strong>Author: Jessica Bennet</strong>

<strong>Deficiency Judgments in California</strong>

The good news for California borrowers is all purchase-money loans on a one- to four-unit residential dwelling are exempt from deficiency judgments.

Hard-money loans in California -- loans taken out after the home was purchased through a refinance or second mortgage -- <strong>can</strong> be subject to a deficiency judgment under the following conditions:
<ul>
	<li>The lender forecloses under judicial proceedings <em>(California      Code Civil. Proc. § 726).</em></li>
	<li>Most lenders foreclose through a trustee's sale;      however, which does <strong>not</strong> give the lender the right to pursue a      deficiency judgment, with one exception <em>(see second hard-money <strong>second</strong> mortgages below)</em>.</li>
	<li>A three-month time limit applies to actions for      deficiency judgments under a judicial foreclosure.</li>
	<li>If the second mortgage is hard money and the lender has      lost security for that loan through a foreclosure or short sale -- making      the security for the promissory note worth nothing -- the beneficiary of      that second mortgage <strong>can</strong> pursue a deficiency judgment <em>(Roseleaf      Corp. v. Chierighino, 59 Cal. 2d 35 (1963).</em></li>
</ul>
<strong>Negotiating Collection</strong>

Some hard-money lenders sell the promissory note to an investor after a foreclosure for pennies on the dollar. Then, the investor will attempt to collect the debt.

Even though a lender may have accepted, say, $1,000 for a $100,000 second mortgage through a short sale, the security for that hard-money second is released but the promissory note may not be. A short sale seller such as our reader might believe the ordeal is over, until one day he receives a phone call, asking for repayment.
<ul>
	<li>Realize that the lender most likely will negotiate for      a discounted payoff.</li>
	<li>The lender may ask for a new promissory note to replace      the old promissory note. In that event, make sure the lender sends a      "paid in full" promissory note.</li>
	<li>If the lender has already sold the note, the discount      may be greater.</li>
	<li>Not all hard-money promissory notes must be paid in      cash. Some lenders will accept payments.</li>
	<li>If the lender directs payments to another entity,      realize that the note may have been sold at less than its face value, and      that new lender may accept an even lower amount as payment in full.</li>
	<li>After the note is paid in its entirety, ask the lender      to return the promissory note marked "paid in full."</li>
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