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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Even after home is foreclosed, deficiency comes due
Bankruptcy Adviser

Paying a mortgage deficiency

Dear Bankruptcy Adviser,
We are in the process of foreclosure, and the lender is seeking deficiency in this case. How do we pay for this deficiency, and how will it be handled after they foreclose on our home? I can't believe they are doing this. I have begged to have my home refinanced at a lower rate. We are walking away because we don't feel it is worthwhile to keep the home at this interest rate and we want to know how they will get the deficiency.
-- Brenda

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Dear Brenda,
It is a horrible world out there right now for people trying to save their homes. And some states permit the lender to make matters worse. Obviously, the mortgage company wants to be paid the difference between the sale price of the property and the actual amount borrowed. In many states the difference, called a deficiency, can be collected as an unsecured debt after the foreclosure has been completed. But rather than ever collecting the deficiency, the borrower quite often is forced into bankruptcy.

Typically, the mortgage lender will either assign the deficiency debt to a law firm or sell it to a third-party collection agency. A letter will be sent to you stating that you owe the mortgage company money and must pay the deficiency in full or start a payment plan. If you do not respond within 30 days from the date the letter was sent, then the collector will consider the debt to be valid. At that point, someone will make the decision whether you are a good candidate for a lawsuit.

Hopefully, you will not be sued. There are many factors a collection firm or agency considers before suing someone. For example, if you are between the ages of 35 and 60 and have a full-time job, then you will be an ideal candidate for a lawsuit. Your wages could be garnished and your bank accounts could be levied once a judgment has been obtained. However, if you are 65 years old, collecting Social Security or disability income, and have no other assets, then it is possible that you will not face a deficiency lawsuit.

Also consider the other debt you may have incurred trying to save your home, i.e., personal loans, credit card debt, etc. Depending on your total amount of unsecured debt, you may have no choice but to file for bankruptcy protection.

At this time, you need to do a financial assessment of your current income versus your anticipated future expenses. This will let you know whether you qualify for bankruptcy or whether you will need to pay back the loan deficiency.

Make sure that you contact your mortgage lender immediately. Some mortgage companies are providing up to $2,500 to borrowers for moving expenses. The lender does not want to incur the costs of foreclosing on your home and then evicting you from the property. This way, you get some money to help with your moving costs and the lender gets to sell your home as soon as possible.

I am so sorry for your horribly difficult position right now, Brenda, but the worst thing you can do is nothing. You must be proactive immediately to make this transaction as easy on you and your family as possible.

Bankrate.com's corrections policy -- Posted: Dec. 11, 2007
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