Deficiency Judgment – What is it?

Deficiency judgment

A deficiency judgment occurs when a property has been sold at a discounted rate, either by a short sale or at auction.  When the property is sold at the discounted rate, many banks will sue (deficiency judgment) the homeowner for the difference between the sales price and the note amount.

Deficiency Judgment| Example

• A property is sold via short sale for $100,000.
• The note amount was $120,000
• The difference, or deficiency, between the two is $20,000

In this situation, the banks may sue the homeowner for the $20,000 as a deficiency judgment.

Deficiency Judgment | How can a homeowner prevent this?

If a home goes to auction, there is nothing a homeowner can really do to prevent a deficiency judgment.  In the case of a short sale, the real estate professional performing the short sale can try to negotiate for the ‘satisfaction of the loan’.  The satisfaction of the loan means that if the banks agrees to the short sale price, they will not pursue a deficiency judgment against the distressed homeowner.  However, banks are generally waiving the satisfaction of the loan portion in their approval letter.  Will they continue to pursue a deficiency judgment against a distressed homeowner anyways? Part of the short sale process involves giving the banks’ the homeowners’s financial information. From experience, if a homeowner doesn’t have any assets or money available, the banks will probably not waste their time and money suing the homeowner for a deficiency judgment.  It is important to note, however, that banks do have the right to obtain a judgment on that deficiency remains for five years after the date of the foreclosure.

Deficiency Judgment | How does is affect the homeowner?

Most homeowners don’t realize that a deficiency judgment can follow them around for several years after the discounted sale and affect their ability to own property for up to 20 years!  According to Pennsylvania Board Certified Real Estate Attorney  Mike Chesser:

A judgment becomes a general lien on all the real property owned by the Defendant.(If husband and wife own property, then the judgment becomes a lien against everything they own together). That judgment will also affect every future real estate or banking transaction the debtor attempts. Even if the debtor is discharged in bankruptcy, the bankruptcy will have an effect on the debtor’s credit rating, on the debtor’s ability to buy or sell real estate, and, in general, on every future financial transaction or money account the debtor seeks to make, at least for a while, probably measured in years.

A judgment will last up to 20 years in the public record. That means that during the entire balance of the time during which most investors would be active, their willingness to own and invest will be affected by a judgment if left unpaid. It may be that neither the people involved nor the economy as a whole can afford the dampening effect of judgments held over an entire generation of investors.

Mr. Chesser’s article gives a very balanced look at the effects of the deficiency judgment on both the banks and the homeowners.  To read his article, please visit http://www.thedestinlog.com/articles/loans-16611-estate-mortgage.html

Deficiency Judgment| Opinion

When the option of not paying a mortgage arises for a homeowner, difficult decisions need to be made.  When the choice becomes staying in a house one cannot afford any longer or feeding one’s family, the obligation of each parent is to take care of their family first, not the bank.  After all, banks have received billions of dollars from the tax payers to help ease the pain of default mortgages.  At the same time, there should be financial consequences to defaulting on a loan.  But these consequences should not be inhumane nor should it have a long-term damaging affect to a large group of people who, like many others, simply guessed wrong about the future of the economy when purchasing a home.  There needs to be a middle ground of accountability for both parties, common sense needs to be used, and a ‘robo’ deficiency judgments against all homeowners isn’t the best solution.

Deficiency Judgment | Conclusion

Deficiency judgments occur when the bank sues the homeowner for the difference between the note amount and the discounted price of the sale of the distressed asset.  Banks can evoke their right to a deficiency judgment within 5 years of the sales date, and if performed, can have be damaging for the homeowner for several years.  Deficiency judgments are a good reason for the distressed homeowner to pursue a short sale for the ‘satisfaction of the loan’ rather than just letting the house go into foreclosure.

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