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Avoiding Deficiency Judgments

The laws of most states allow the lender to come after you for a deficiency—that is, the amount by which the foreclosure sale proceeds fall short of the loan amount. However, a few states protect homeowners from liability for deficiencies from mortgages on residential homes that were used to purchase the homes, or make it too expensive for the lender to pursue the issue. See the appendix for your state’s rule.

You don’t need to worry about a deficiency if:

• your state’s law prohibits deficiency lawsuits. Or
• the lender agrees, as part of accepting a short sale or deed in lieu of foreclosure, not to come after you for any deficiency.

But if your state does allow deficiency lawsuits, or you have a second or third mortgage, you could be on the hook for a lot of money even after you lose your house. You can wipe out that debt by filing for Chapter 7 bankruptcy. (See Ch. 6.)

Some foreclosure advisers will tell you that deficiency lawsuits are rare and not to worry about them. And it’s true that because it’s expensive to sue, lenders don’t often pursue deficiency lawsuits, but some do if you have substantial assets that could be recovered. In any event, it’s hard to know whether your case will be the exception. Even if most don’t end up in a lawsuit, do you want to take the chance? Bankruptcy is your ultimate safety net when it comes to any liability arising from your former home ownership.