I've been getting many inquiries from homeowners about what they can do if they lost their home to foreclosure and have a junior lienholder pursuing them with a deficiency judgment. I understand a chp 7 or 13 bankruptcy can alleviate this (although some don't qualify) but my question is,
How often do junior lienholders ACTUALLY pursue homeowners with a deficiency judgment? Any stories? advice? comments?
The purpose of knowing this is to help homeowners get a better understanding of all the negative effects a foreclosure has and to push them to do a short sale which, as I believe we can all agree, is the best exit strategy for homeowners :)
Would appreciate your comments!
Peter
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Depends on many factors...recourse being the most obvious. The reality is very few major banks have gone after people, but a few of the cash-out second lien holders do. There is a statute of limitations of 2 to 4 years from foreclosure date..forgot.which one..but after that period the borrower is free and clear if the lender didn't file against them before that date. Many cash-out refinances and HELOCs are recourse in many states...and the debt survives the fc sale. Luck of the draw on who owns the notes really. Some charged-off seconds get sold to lawyer groups who are filing on people all over the US.
The CA law mentioned is only if the lien holder approved the short sale and does not apply on a foreclosure.
The California law does apply to a foreclosure. California is by definition a single action state. The foreclosing entity can only take one action against the borrower. If they foreclose, they are done. They can take no further action to pursue any deficiency that may exist. Any sold out junior lien holder still has all rights to pursue deficiency should there be anything to chase. Also, the single action and any anti deficiency laws only apply to non judicial foreclosures. Final thought about that 2-4 year statute of limitations. Yes there is a 4 year statute but it only applies to suing the borrower personally. The lender still has the ability to foreclose on any valid lien. The lien doesn't go away after four years, only the ability to sue the borrower.
Seller Beware! Non-recourse in California only applies to purchase money loans and very few 2nds are purchase money, most are re-finance or HELOC. For non-purchase money loans, I have been advised by both Real Estate and Bankruptcy attorneys that the note survives the foreclosure (even though the lien of the against the property is extinguished). The note now become an unsecured debt and can be pursued until the statute of limitations runs. As mentioned previously, there are companies buying up these stripped junior liens and intend to pursue them. Especially if the seller has a good job, accumulated future assets, etc, they need to beware. They could be looking down the barrel of a lawsuit up to 4 years after the lien is stripped. I ALWAYS advise a homeowner who is considering foreclosure to speak with an attorney about the continuing liability on their junior liens. The benefit of a short sale in California, is the seller is protected against a deficiency judgment by LAW. Not sure is the same applies in Washington. However, the selling point is of a short sale is that you, the short sale negotiator, can remove the uncertainty of the deficiency judgment through the approval process. Good Luck!
The safe assumption here is "yes." However, most of them sell the debt or "off" the debt to collection agencies for pennies on the dollar and then the borrower has the option of settling many of them for 10-25%. There are a few exceptions to this. Time is usually on the borrower's side here as once the debt is formally charged off, it moves from loss mitigation (get as much as we can mentality) to loss recovery (get what we can mentality). This also depends on which state you are in - always consult an attorney for the best legal advice.
Yes they can pursue if you are in non-recourse state. They have to follow the laws in your state and they may have a certain timeframe they can file in court. If they are granted the judgment they can pursue the homeowner in any way they want. I see most sell off the debt to collections companies.
Buying the bad debts from banks is a popular and growing industry. They're buying for 2-5 cents on the dollar, and then they come knocking. In Florida, we are a recourse state, and they have 5 years from auction date to file suit, then 20 years to collect.
Also, in some non-recourse states, they buy the seconds anyway. The approach they use is "non-recourse does not apply to fraudulently obtained loans. If you "exaggerated" your income on your no-doc loan app, you committed fraud, and we are allowed to collect, and you may have some criminal liability...so pay up and we'll drop it."
How about if the bank " exaggerated " the appraisal so you can get the second LOL
very interesting!
Let me clarify. I am in Washington state and it is a non-recourse state.
From my understanding, the lienholder who forecloses on the homeowner's property is not able to pursue. However, all other lienholders who did not foreclose on the property still have the right to pursue the homeowner for the balance owed.
Wondering how often they actually pursue or do they typically write it off and walk away. Thanks for the great comments guys!
Peter - If the junior lienholder only "releases" its lien without settling, I would count on them pursuing the homeowner for the rest. I wouldn't bet against it. As Kimberley says, the answer may be more state specific.
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