April 13, 2024


Mad about real estate

What To Do When You Are Sued For a Deficiency Judgment

Deficiency judgments are ticking time bombs that can explode years after borrowers lose their properties, either through short sale or foreclosure. Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there’s a second mortgage or other liens. Don’t ignore the possibility of deficiencies.

What can be scary is that the judgments don’t have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. Sometimes lenders go after borrowers walking away from their homes if they have other assets. Banks can also pull credit reports to see if it’s a strategic default.

If you could, maintain simple lifestyle and try not to keep a lot of assets under your name within 5 years of unloading your investment properties via short sale, deed in lieu or foreclosure. These assets can be the reason lenders decide to pursue you in the court. They can also become the obstacle to settle debt with your creditors in the future.

If your lender does file suit in the court, you should seek legal help immediately. Depending on where the property is located, you may be protected under the state law. There are also few court precedents that favor lenders’ pursuit of deficiency judgment; we expect the number of filed court cases to grow fast in the next few years when lenders start taking actions. Hiring legal professionals boosts your chance of winning in the court.

In the unfortunate case that a judgment was obtained against you, the lenders have up to 20 years to collect. In the case of foreclosure, lenders can pursue deficiencies in more than 30 states. Do not ignore the judgment unless you plan to file bankruptcy protection. Seeking bankruptcy should be the last resort to handle excessive debts that can’t be settled or negotiated to a reasonable amount. The record will stay with you for more than 7 years.

A better option to deal with judgments or collection agencies is to know your rights first and then negotiate/settle the payment. Checking debt validation and the statute of limitations should be your first step in the settlement process. Many techniques can be applied to negotiate a much reduced payment amount that is affordable to you.