Deficiency Judgments, Foreclosures and Homesteads
I recently published an article concerning the MERS Foreclosure defense.As a follow-up, this article will discuss the situation where a lender has successfully foreclosed and the borrower is now concerned about a possible deficiency judgment. As you know a deficiency occurs when the collateral (a vacant lot, condo, home) is sold at the Clerk's sale and the sales price is not high enough to pay in full the balance due to the lender.
Keep in mind the deficiency issue is one of collectibility. The bank can sue the borrower for the deficiency but will have trouble collecting on it unless there are assets. If there are no assets, its like the Bob Dylan song: "If you ain't got nothing, you got nothing to lose." Homestead is exempt from a forced sale unless there is a mortgage on it to the lender.
So here are some common questions concerning deficiency judgments.
- For how long after the foreclosure sale does the Bank have a right to decide to go after a deficiency? Florida cases say that depends. If the foreclosure sale judgment reserves jurisdiction allowing the court to decide whether to grant a deficiency, then the Bank has one year to come back and ask for the Deficiency Judgment. If the bank does not do so, the debtor can ask for the case to be dismissed for lack of prosecution. If the foreclosure sale judgment does not reserve jurisdiction the Bank has 5 years from the date of the judgment to start a new case for a deficiency judgment.
- How does homestead property matter? Depends. If the homestead property is a new home and the bank has no lien on it then it is exempt under Florida's homestead protection. So even if the bank has an uncollected deficieny judgment then it is not subject to a forced sale. The bank can sue the debtor whether he lives in a homestead or not, but the Bank cannot collect against the homestead unless it has a mortgage. The easiest way to undertand this is unless the Debtor has waived his right of homestead (which is what a morgage does) then he has homestead protection from debt collection as to that asset.
- What does a Bankruptcy do? This is a complicated issue which I will leave to a bankruptcy specialist like Scott Spradley in Flagler Beach. If the debtor files bankruptcy is wipes out all debts inculding deficiency judgments.
Besides the issue of deficiency judgments and collection, there are issues about asset protection, short sales, deeds in lieu of foreclosure, and the tax consequences of a short sale. An interesting fact I read lately was that between 2000 and 2007 the size of the national mortgage debt on homes in the USA went to 10.5 trillion dollars from $3.5 trillion. So far, since 2007, the mortgage debt has only gone down to $10.2 trillion. Somehow we have got to get rid of about $7 trillion in mortgage debt before the housing crisis will be behind us.
