Will I Owe a Debt After Foreclosure?

Well, let’s begin with a different question: will I be sued after a foreclosure? Whether you can be sued after a foreclosure depends on whether your state is a deficiency state or an anti-deficiency state (you want anti-deficiency).

What is Anti-Deficiency in a Foreclosure?

An anti-deficiency law is a law that states that a lender in a real estate transaction cannot pursue a judgement against the borrower if the borrower defaults on the underlying real estate loan and the lender fails to recoup the entire amount of the loan. The “deficiency” is the shortfall that a bank gets stuck with if a foreclosure sale does not yield enough to cover the amount of the mortgage loan. Sound too good to be true? Nevertheless that is the law in some states, most notably California. You can read about California Anti-Deficiency Law.

There is actually a fairly sound policy reason for anti-deficiency. Before and during the great depression, lenders were free and easy with mortgages–and property appraisers played right along (sound familiar?). When a borrower foreclosed, the lender got the property, and then got to go after the poor borrower’s last remaining assets. This pushed many families into poverty. Anti-deficiency laws place the burden on lenders, as if to say: “you, lender, are best positioned to properly appraise a property, so don’t lend beyond that value, or you’ll be stuck without recourse.

Will I Be Sued?

In an anti-deficiency state, you will not be sued because the bank does not have the right–you are free to begin your financial life anew.

But, in a deficiency state, the lender does have the right to sue you. However, believe it or not, not all lenders will sue for deficiency. Statistics are not available, but the chances are better than 50% that you will not be sued for deficiency. What else can a lender to do? If they sue on the deficiency, they might win a judgment that will never be paid; a foreclosed borrower is not exactly sitting on top of the world at that moment. Or, they might force the borrower into bankruptcy, and again the lender gets nothing. And, suing evicted and foreclosed families is hardly a great business to be in.

What is most common is that the lender reports the foreclosure on the borrower’s credit report, and forgives the debt. This forgiveness of debt has other consequences, as you can read in the next article in the series,
1099 After Foreclosure | Cancellation of Debt Income.

Portions of this article were contributed by Northwest Indiana Bankruptcy Lawyer Jonathan Petersen.

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