Deficiency Judgments!

[The Professor]

Please start your own thread with this and additional information. You need to provide sufficient information for each property. Answer questions like:

1. The state where the property is located.
2. Your estimate of the fair market value of the property.
3. Was the property purchased as your primary residence?
4. For each loan on the property, identify the lender, current loan balance, and whether the loan was created at the time you purchased the property and if the entire loan proceeds were used to purchase the property.

Daniel

[WorryinAZ]

Hi Professor,

Does the AZ law allow the 2nd mortgage bank (BOA) go after my 401K for deficiency judgment? I have no other assets and barely have enough money to pay bills monthly.

We bought the house in 2005 for $450K, finance $360K first with CitiMort, $65K second mortg, downpayment $25K. A year later we refinanced the second mortg with BOA (HELOC) for a total amount $100,000 (took out additional cash to pay bill). Does it mean the entire second mortgage balance of $100K is considered non-recourse or just the additional cash we took out?

Thank you for your advice. It means alot throughmy difficult time.

[The Professor]

My favorite answer, and probably the one you didn't want to hear. That answer is, "it depends." If the 401K plan is ERISA qualified, or subject to some other exemption, is is probably exempt from execution by a creditor obtaining a deficiency judgment. Since state law varies and application will be determined by where your reside, you will need to talk to an Arizona lawyer to get an answer. Best in that regard is to talk to a bankruptcy lawyer since they deal in this area of "exemptions" on a regular basis.

Daniel

[ORNV3]

Hello again,
I have one more question for you. The house next door to mine just sold for $160000. I would assume that my house will sell for the same amount or less when it comes time for the auction. I owe $215000 on the first and $92000 on the second. I've only been worrying about the second up until now, but now I'm thinking I should be worried about the first too. If the house sells for $160000, that will leave a $55000 deficiency on the first and obviously the second totally out of luck.

As I understand it, the first mortgage will only have 6 months to try to collect the deficiency (Nevada). Is that correct?

Is the statute of limitations for the second 3 years?

I've been trying to figure out these number but I'm not sure if I'm looking at the right information.

Thanks!

[The Professor]

Based on what I've been able to find, it appears you are correct on the 6 months time limitation to bring an action based upon a deficiency judgment. Unfortunately it appears the limitation on the holder of the second would be six (6) years (see below).

Nevada Revised Statute Section 40.455 - Remedies - Special Actions and Proceedings states:

Deficiency judgment: Award to judgment creditor or beneficiary of deed of trust.

1. Upon application of the judgment creditor or the beneficiary of the deed of trust within 6 months after the date of the foreclosure sale or the trustee’s sale held pursuant to NRS 107.080, respectively, and after the required hearing, the court shall award a deficiency judgment to the judgment creditor or the beneficiary of the deed of trust if it appears from the sheriff’s return or the recital of consideration in the trustee’s deed that there is a deficiency of the proceeds of the sale and a balance remaining due to the judgment creditor or the beneficiary of the deed of trust, respectively.

2. If the indebtedness is secured by more than one parcel of real property, more than one interest in the real property or more than one mortgage or deed of trust, the 6-month period begins to run after the date of the foreclosure sale or trustee’s sale of the last parcel or other interest in the real property securing the indebtedness, but in no event may the application be filed more than 2 years after the initial foreclosure sale or trustee’s sale.

As to the second, once foreclosed, its associated remedies appear to be written contract based, and the statute of limitations is 6 years under NRS sec. 11.190(1)(b). That law states:

NRS 11.190 Periods of limitation. Except as otherwise provided in NRS 125B.050 and 217.007, actions other than those for the recovery of real property, unless further limited by specific statute, may only be commenced as follows:

1. Within 6 years:
(b) An action upon a contract, obligation or liability founded upon an instrument in writing, except those mentioned in the preceding sections of this chapter.

Daniel

[ORNV3]

Thanks. Another question...

The house is in my name only and I am not married. I want to get married this year but I don't want this mess attached to my future husband at all. I think this is why I have the strong desire to file bankruptcy and just get it over with, but the more I think about it, I don't want to do file unless I have to. If we get married will he be accountable in any way for this debt?

For the next 2 years I will still be the one making the money but after that we plan on starting a family and I will most likely not work for a few years. This is what got me started thinking about the time limits. My income for the next two years will be pretty low so most likely they will leave me alone... then say I am totally out of the work force for 4 a few years. After that....If they had not tried to collect the debt, or had but had not been able to, would I be in the clear?

[The Professor]

The problem you face is that six year statute of limitations. A lender (or their transferee of the debt) can simply sit back and do nothing for 5 years, 11 months, and 29 days after you breach the agreement (promissory note) and initiate a lawsuit. In the meantime you've managed to get back on your feet, get a great job, and have money.

I would suggest talking to a BK lawyer in Nevada and get their insight. I'm only in the loop on this situation based upon what I'm reading here and I do not have a feel about how these "uncollectible second loans" are being handled (although I do have my ideas in that regard and it isn't a good thing for those in your situation).

Daniel

[ORNV3]

I guess my best course of action is to do nothing for now. It seems like it's best to just let to foreclosure take place, try to settle the second and go from there.

I just wonder if it's best to get it taken care of before I get married....

[mollysfolly]

Ornv the professor is correct in his statements. Is there any reason you do not want to declare bankruptcy? I'm also a Nevadan and have a house now 9 months behind, bought at 270,000 now listed as a short sale for 119,000, Investor declined an offer for 130000 in nov. On my cul-de-sac of 6 there are 3 shorts including mine and 1 foreclosure not listed on market yet. I have read your situation and things are not as rosy for default as our neighbors in AZ and CA. the first plan of action I would do is to try a short sale although chances are slim with 2 loans.
The biggest concern is the second as prof said they do have 6 years to wait and they will as I get statements from a collection agency for the previous owner of a house we bought after they foreclosed and its been a year since they foreclosed on the property. if you do nothing they will be able to sue you foraround 150000 after fees and interest in six years and will probably wait til the end of the statute of limitations to see if your finances improve. You can always try to negotiate a settlement but a bk will only costin Vegas around$1200-1500 and any settlement would most likely be higher.
Whatever you do do not get married until this is resolved by anyway you think is best. If you bk before marriage your hubby can have everything in his name after marriage and you can slowly rebuild your credit. My plan of action is to try short sale first, which I do not think will succeed. CW has not filed a notice of default yet, when they do i will most likely file bk a couple days before the trustee sale as my prebk asset planning will be complete. My credit score dropped from 780 to now 613 on experian and I'm current on all account except 1st and 2nd the CW home. I approached this as a bussiness decisionand have lurked on loansafe for a year. I will be consulting with a few bk attorneys later this month. I currently see no way out if they will not negotiate. The laws in nevada are bank freindly. The likelyood a first will pursue a deficiency is rare unless insured like racoon's case where there is lenders insurance.
Ornv unfortunately I no no one who was able to settle a second because most declared bk of were able to sell via short sale of the many who foreclosed in my inner circle of friends. If you have any questions you would like me to pose to a nevada bk attorney let me know as I'm compiling a list for the free consults. My other house was also 265,000 and now worth about 190000 but is fha fixed and better neighborhood and I will be here for at least 15 years and have reduced more in principle than previous in 8 mo, hopefully I can cram that down but no hopes up.

[ORNV3]

Hi Mollysfolly,
Thanks for the info. I think about the whole situation everyday, pretty much 24/7... I keep going back and forth. I do think bankruptcy is the best option because that will allow me to have a fresh start. I just get nervous about it sometimes. I don't know why... I guess it's because it took me about 2 years to work up the guts just to let go of the house. I looked into a short sale over a year ago and the realtor that I talked to said it would be impossible. At the time I could still make the house payment, I think he just wanted me to stay there.

I was pretty much set on bankruptcy, but then I got my tax return which is somewhat significant... I'm trying to figure out what to do about it. My property is in Nevada but I've been living in Oregon for the last 6 months. I've met with a few BK attorneys here in Oregon but they don't know the Nevada laws.

I'm trying to do some preBK planning myself.... but it's been difficult because I don't know anyone who is familiar with Nevada exemptions.

As I understand it, I will file BK in Oregon but use Nevada exemptions. I've been looking at the Nevada exemptions and it looks like they allow equity in a motor vehicle up the $15000. Is that what you've found???

[ORNV3]

I was just re-reading your post and saw that you are compiling a list for your BK attorney. It would be great if you could ask a few questions for me....

At first things were pretty cut and dry for me because I have basically no money and no assets. As I said before, I just got a pretty big tax return (big for me) and I want to use it and not loose it. I did earn it!

1. Will the tax return count as income? It could push me over the median income.

2. Is the motor vehicle exemption in fact $15000. If it is, would it be considered fraud to use money from a tax return to buy a car rather than paying the mortgage? How long should one wait after purchasing a car and filing BK.

[mollysfolly]

Ornv in reply to your qestions yes 15,000 is the motor vehicle exemption from my understanding. As far as I know your tax return does not affect your income go to legalconsumer.com and plug in your data for Nevada and see what happens, there I'm over median but qualify for a 7 due to expenses, google bk forum and you will find another great group of people who will help with your questions just like here at loansafe.
Before you bk I strongly urge you to list the property as a short sale, if that does not work try a deed in lue as long as they release you of any liability. Allow your tenets to stay through the whole process rent free. At last resort file bk as preplaning you can increase your car ins limits, take out disability insurance short term and long term, as well as a term life insurance as you can have $1000 in life premiums according to nevada exemptions. also adjust your w-4 income tax withholdings so you get no refund next year as the trustee will most likely take it next year. Also new incomes for mean take start march 15. I am not a lawery so Icould be wrong about the bk stuff but Ive researched well.
on question number 2 no its not fraud to buy a car rather than paying your mortgage because you need a car to get to work to pay your other obligations, of course dont go out and buy a benz or audi or lexus it upsets the bk trustee. Also you could use that tax return money to pay the laywer, any purchase over $600 would rasie flag but you can buy a car and bk anytime after that as long as you reaffirm they wont take it back.

[needhelp-GA]

Hello,
I saw your post, Professor Shays. It was very helpful. I should be receiving my official Notice to Default for foreclosure within the next couple of weeks or so. Our state forecloses quickly, soit should go up for auction within 60 days after that.

Our r.e. agent is attempt to find a short-sale buyer, but the chances of that are very slim to none in our small-town rural area.I haven't corresponded with the 2nd lender at all, but my current payment is now late.

According to your post, I should probably wait until the home forecloses before attempting to negotiate with the 2nd lender (HELOX). Is that correct?

Thank you.

[The Professor]

The right time to negotiate is always a tough call. Best for you of course is when you appear to be broke (or close to it). That is the point just before you win the mega lotto. Best for the lender is when they need to resolve the outstanding debt and move along (often near the end of a quarter when they have income to offset the loss, unless they have already written off the loss and will have to recognize income, in which case a lousy quarter ending is best).

But I would try to settle it before they assign the debt to an aggressive collection agency.

Daniel

[needhelp-GA]

Thanks so much, Prof. Shays. That really helped eliminate some of my confusion.

[baileys dad]

Hello again Prof,
This maybe a "it depends" question, but let's see...
I have posted many questions as I have, as of now, an unresolved issue with an unsecured second here in ca....
My second has not received payment for 5 months. I have let them know their and my fate rests in the hands of the first lender, who is looking at my mod request. Any idea what kind of considerations they might be looking at in terms of when to hand it over to a collector?

[Enough Already]

Hi all,

I'm posting this following in a few of the Deficiency threads, so hopefully, everyone will see it. Seems like important info to me, and a new twist. I found this on a FL asset protection attorney's blog:

Some Second Mortgages Suing Homeowners To Collect Notes Instead of Foreclosure or Deficiency Judgment

I have stated before in this blog that most large mortgage companies were not pursuing deficiency judgments after foreclosure. More recently, I have seen a few situations where second mortgage holders were suing the homeowners for personal judgments. The second mortgage companies were not suing for a deficiency judgment after the first mortgage foreclosed. Instead, these second mortgage holders have filed law suits against the homeowners to collect the underlying promissory note. This means that the mortgage company does not wait for a first mortgage foreclosure and does not initiate its own foreclosure on its second mortgage. After the homeowner misses few second mortgage payments, the second mortgage company accelerates the entire balance of the mortgage note (which is a standard provision of most notes) and sues the homeowner to collect the entire note balance. The mortgage company retains its second mortgage; any proceeds paid to the second mortgage company from a sale of the property would reduce the balance of the judgment.
Suing directly on the promissory note without foreclosure is common practice for commercial loans. Commercial lenders hold most loans in-house as contrasted with most conventional mortgages which were securitized and sold to investors. Commercial lenders rather get general judgments against the borrower than take back real estate which they cannot sell and which would not satisfy the loan. I have also seen isolated cases where small, local banks are suing borrowers directly on the note to collect residential first mortgages. These smaller lenders are following the lead of the commercial loan departments to seek personal judgments in lieu of taking back real estate. I have not seen any large banks or mortgage lenders sue homeowners directly on their notes rather than instituting foreclosure.


This freaks me out!

[ORNV3]

Freaks me out too!

[trappedincali]

I doubt this is a widespread practice. On a large scale it would be very costly to enter such litigation with all your clients. And, my loans are not held by a "small, local bank". If I was truly concerned with this possibility (which I'm not, since it is just a possibility), I would have simply continued to pay the second until the first forecloses.

Worst case, there's always Chapter 13. They can only get so much money from you in 3-5 years. If I thought it would come to that, I suppose I could have a friend place a huge lawsuit against me OR form an LLC and come after me, therefore getting first place in the pecking order before the second holder. The second would get nothing.

Could always separate from the wife, on paper, an award a large alimony/child support payment which would trump their collection claim.

There are always lateral options, however unethical some may think they are.

[Argh!]

Professor Shays,

I declared CH 7, and intended on keeping the house (I already had my 341) I now realize that it is not possible.

Can I walk away and be "judgment" proof?

[needhelp-GA]

Hi. I posted earlier in this thread and Professor Shay replied that it may be a good idea to approach the HELOC lender for a debt settlement.

First question is, should I attached all the typical documents to my hardship letter and debt settlement request the same as if it were a short sale (for example, last pay statements, listing agreements). I know I should attach my income/expense list, but I'm not sure about the rest.

Second question: I've put together my hardship letter. The third paragraph (before my sob story) is my request for debt settlement. Could you read this paragraph and tell me if my phrasing is correct or if I should word it a different way? I'm trying to cover all the bases, but don't want to be incorrect. Our loan is $51,000.
----------
Quoted paragraph:
We would like to negotiate a debt-settlement figure that we can could borrow from family. If you sell the loan to a debt-collection agency, you will not get that much money for it. The foreclosure will release the lien and probably won’t have enough money to pay much of your loan due to the high number of foreclosures and our rural area. We hope you are willing to allow us to negotiate with you to settle the debt. We offer $5,100 at this time and must have in writing that the debt would be considered paid with no further liability, recourse, or collection attempts. There would have to be no 1099-C since it is a “debt settlement” instead of “forgiven.”
----------------
Thank you for your time in reading this and giving suggestions. I truly appreciate it.

[kent302]

"Some Second Mortgages Suing Homeowners To Collect Notes Instead of Foreclosure or Deficiency Judgment"

This brings up a question that's been on my mind. I don't mean to add to the worries of people in this situation, but every path involve carefully evaluating consequences and to making the best decision.
Bear in mind, I am not making any moral judgement here, the decade long excesses of the FI-RE industry had largely brought this mess upon all of us and themselves.
But why would a business entity that will be looking $100's K of losses due to a mortgage default/foreclosure not sue the homeowner for compensation if there is legal grounds to win enough to cover the legal expenses to do so?
In an hypothetical example, if I have refi loans cashed out, now I'm 250K upside down. And if I have $250K in stocks or home eq in a rental house. Furthermore if I have an income stream of 100K/yr. The bank can spend 50K to hire lawyers to sue me to get 100K or more in recourse.
Seems like also a straigth-fwd business decision, what is keeping them from doing it?

-kent

[azuw67]

kent302 - I suspect you are exactly right. In fact, I would argue that especially if a bank is publicly held, the bank officers would have a duty to their shareholders to do exactly what you say, in that circumstance. However, many forum members are in different hypothetical circumstances, which might look like this: Suppose a person is $100k upside down to one lender on a HELOC, and $50k upside down to another lender who has no recourse, with another $50k in student loans. Suppose the person has no equity in any other property, income of about $30k a year, and no notable assets other than $100k in tax-deferred savings (which would be pretty untouchable in bankruptcy) and a couple of five year old $6000 cars. In this case, it doesn't look like a worthwhile pursuit for the HELOC holder, because the bank knows all they will accomplish is pushing the person into bankruptcy, where what little money is available over the next 3-5 years will be split between the student loans and the lenders. Thus, suing is going to get the banks "not much at all", and thus the banks might be much more inclined to listen to settlement offers.

Everyone: What do you think of needhelp-GA's proposed wording? What about the 1099-C part of it - would a settlement allow a way around a 1099-C, or would the needhelp-GA receive a 1099-C for $45.9k of "forgiven" debt ($51k-$5100)? The latter is what I would assume (so I must be wrong).

[Enough Already]

I agree, Kent. If they did an asset search and found a person had the money, income/assets why wouldn't they sue? Why would they just take the loss? As Prof Shays mentioned they will do asset searches, and most likely pursue the people who can pay up.

This idea of suing prior to the foreclosure is new to me, and it seems pretty aggressive. We have assets to protect, so this changes our plans. We now plan to continue making the payments on the 2nd mortgage, until we get moved into our other FL property, where we can protect our assets under that property's homestead.

This stuff just stresses me out.

[Enough Already]

PS: Needhelp-GA, I just don't know enough about the taxes to give a good answer. I do think offering a settlement is a good idea. Please keep us posted on their response.