If your home is foreclosed, you might still owe the lender money. The amount you owe is called the “deficiency” or “deficiency balance.” (You can learn about mortgage foreclosures at Home Foreclosure.)
What’s a Deficiency Balance?
When your lender has your home foreclosed, it sells the property at auction. If the money gained from the sale don’t cover the total of what you owe to the lender—which they rarely do because of fees charged by the lender—you might owe the remainign balance, called a “deficiency” or “deficiency balance.” (Learn more about the Foreclosure Process)
The Foreclosure Sale
Foreclosure laws among states vary but in general the lender must inform you through notice that your home is being sold. It may contain the date, time, and place of the foreclosure auction of your home. If you have questions about your rights, please seek at Foreclosure Defense Attorney in your area.
Avoiding the Deficiency Balance
One suggestion for avoiding a large deficiency balance is to ask the lender for a short sale or sale of the property so you do not owe them any money after the sale. If the foreclosure date is imminent, you can hire an attorney to stop the foreclosure without filing bankruptcy.
Some lenders will forgive or write off the deficiency balance if you clearly have no assets. Where the amount forgiven is $600 or more, the lender will issue you a Form 1099-C , and the IRS will expect you to report the forgiven balance as income on your tax return. (Read more about tax consequences when a lender writes off deficiency balance.)
How the lender collects the deficiency balance?
Usually the lender will hire third-party debt collectors and law firms to attempt to collect the debt. Often they end up filing a lawsuit against you to collect the money owed from the deficiency balance. If you do not answer the lawsuit or fight the lawsuit, often the resulting judgment can be thousands of dollars higher because of interest and attorney’s fees. Ultimately, a judgment creditor can garnish wages or bank accounts depending on the state in which you live.
Defenses Against the Collection of a Deficiency Balance
It is common for creditors to make mistakes in the foreclosure process. Most states bar creditors from collecting a deficiency balance if they fail to comply with notice requirements—such as notifying you of the right to cure or of the sale—or didn’t sell the property in a commercially reasonable manner.
If you think the creditor made a mistake, you must raise this defense at the time you’re sued for the deficiency balance. Because these cases can be complex, it’s a good idea to consult an attorney. (To find a attorney near you, visit NACCA’s Attorney Directory)