Deficiency Judgments!

[ORNV3]

Do you think that banks will come after us eventually? I know that no one can know for sure... but what does everyone think?

[kymburley]

I'm sure this won't be helpful, but I'm planning on it. If it's weird and it can happen, it will happen to me. So, I plan for the worst, that way I'm almost always surprised.

[SlammyR]

kym's got it. hope for the best but prepare for the worst is my life motto.

like all grownups, we must be prepared to accept the responsiblity for our actions. walking is not without its risks for us recourse folks. but once you stop feeling sorry for yourself, look at it as a business decision, and stop dwelling about what "could be", you will free yourself.

a possible dj has been my absolute biggest fear. simply accepting that responsibility has freed me like i cannot describe!

tell yourself, "i will deal with it when the time comes, IF it comes, and it will not break me." in the meantime, enjoy your life and your family, and have a savings plan.

[helpinNE]

I live in a rescourse state and had a family member forced to walk away from their house. They had a first and second. The second sold their mortgage to a collection agency BEFORE the first even forclosed. If you have a second that you are concerned about, be prepared for them to sell your account to a collection agency even before the foreclosure is final.

[Enough Already]

Hi HelpinNE,
What bank was their 2nd loan with? Have they tried to settle the debt yet? I've heard it can be settled, in many cases, for a lot less than the actual loan amount.

[helpinNE]

Their second was with Homecomings/GMAC. They put their house on the market and after many months were lucky enough to get an offer. Their first will be paid off and the collection agency that Homecomings sent their account to has approved the sale. Their second was for about $32,000 and they will receive around $6,500. The closing has not taken place and even though I am told this will release them of future liability, I do not know they have actually seen those words in writing yet. I am keeping my fingers crossed for them as this will finally end a very ugly chapter in their lives and allow them to move on.

[kymburley]

Originally Posted by helpinNE

I live in a rescourse state and had a family member forced to walk away from their house. They had a first and second. The second sold their mortgage to a collection agency BEFORE the first even forclosed. If you have a second that you are concerned about, be prepared for them to sell your account to a collection agency even before the foreclosure is final.

My 2nd was sent to a collection agency when I was 34 days late. I guess they "have a feeling" I might default on the 1st, due to the short sale falling through.

[KT in CA]

I have a first and a second. Both with the same lender. Second is for $55k. We are 2 months late as of the 17th of this month. We have received lots of paperwork regarding our first, but nothing about our second. I wonder if they have already sold it. Hmmm...Well if they have I'll just pass the info on to my attorney and let them negotiate it for us.

[Enough Already]

I hope that they won't, but I guess they probably will. I believe they are so inundated with loan mods and foreclosures, that it may take them a while, but sooner or later they probably will.

Although waiting to find out is very stressful I figure we'll just have to deal with it when the time comes.

I'm hoping the state laws that allow deficiency judgments will be changed in the mean time. Wishful thinking, I know, but wouldn't that be nice!

[Enough Already]

Hi all,
Here's an opinion by a FL asset protection and bankruptcy attorney regarding deficiency judgments in general. You may find it some what comforting:

Many callers and clients are concerned with deficiency judgments from foreclosures on investment properties. Some bankruptcy attorneys I’ve spoken with state their business is increasing largely because of their clients’ concern for deficiency judgments. I have written prior blog posts which explained the process mortgage lenders are required to follow to get a deficiency. I had questioned whether borrowers are exaggerating the risk of deficiency judgments. Today I received a call and email from a prospective client who gave me additional first-hand information about the prevalence of personal judgments against borrowers because of mortgage deficiencies.

The prospective bankruptcy client was facing a mortgage foreclosure on an investment property and was concerned about deficiency judgments. The borrower happened to be a clerk at a local courthouse and worked in the section that handled foreclosure suits. I asked the person to check with the civil clerk who handled mortgage deficiency actions to find out the extent to which lenders are actually pursuing personal money judgments against borrowers for deficiency amounts. The person handling deficiency actions reported that only one or two mortgage lenders have been pursuing any deficiency judgments and that a small percentage of foreclosures also involve deficiency actions. While there is always some risk of deficiency judgments, there is evidence that deficiency judgments are improbable in practice. Many people should wait until after the foreclosure process in complete before filing bankruptcy preemptively to avoid a deficiency action that likely will never occur.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

[ORNV3]

Hey Enough Already,
I've been doing a TON of research on deficiency judgements and did run across that article earlier. Take a look at this one by the same author.

I have often written about mortgage deficiency judgments pointing out that up to now few institutional mortgage lenders are pursuing deficiencies in Florida. Borrowers should distinguish between personal liability on first and second mortgages. When either the first or second mortgage holder forecloses the first mortgage will likely take back the property. The first mortgages gets land which eventually can be sold. The second mortgage holder gets nothing at the foreclosure sale. If the first mortgage holder pursues a deficiency judgment (and again, this is usually not the case), the borrow can defend the action in part by arguing that the mortgagee has been satisfied by its repossession of the property. The borrower does not have this defense against the second mortgage. The second mortgage, having received nothing of value in a foreclosure, can sue on the mortgage note. The second mortgage can simply demand repayment of the promissory note underlying the mortgage without going through a foreclosure proceeding. The property value is irrelevant when the lender sues to collect the note.


I have not seen any case to date where a first or a second mortgage lender has sued the homeowner personally. I think the risk of personal liability is significantly higher when there are more than one mortgage obligations. It is also more likely that a second mortgage lender who does not foreclose can wait up to five years to bring suit on the underlying note after the first mortgage lender’s foreclosure action is complete.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida






I think we need to worry about the second mortgages. They aren't going to get anything. Hopefully they will settle.

However, for someone like me..... I have hardly any money left now. My second is for $95000. Say they will settle for 10%. That's $9500! I don't have it and won't for a long long time. BK would cost me $1500 at the most. Credit will be ruined either way so I don't know why I would want to settle it.

[ORNV3]

For those of you who get to live in your homes payment free for a while.... good for you! Hopefully you can save up some serious money and settle the second mortgage. I wish I had that option. The whole reason I'm in this mess is because I had to move. So I don't even live in the house anymore. I guess I should have stopped paying before I moved. Oh well.

[Enough Already]

Hi ORNV3,

I read that one too. Scary for sure. You're right, your credit will be ruined either way. Since you have no other debt a $9500 settlement might be worth saving yourself the BK. They might let you make payments. BK will stay on your record for 10 years.

It's really hard to know what the right move is.

We've decided to wait it out and see what comes.

[ORNV3]

So... I finally talked to a BK attorney today. She was really nice actually! I do qualify for chapter 7, so that's good. She did recommend that I wait and see if I get hit with a deficiency before I file. My financial situation will be the same for the next two years so I don't need to rush into it. She said that I should wait and see if the laws regarding deficiency judgments changes in the next few years. If they do... GREAT, if not then I'll probably file eventually.

I do not live in my house right now because I had to move to another state, but I do have it rented. I was concerned about what to do with the rental money. It's not even enough to cover the 1st mortgage but it's still money.

She said to put it into it's own account and keep it there. If I do end up filing BK in the future, she said the trustee will want to know where that money went and I could get in trouble if I spend it on anything besides the mortgage. If the laws change and I don't file then I'll have a bit of money saved up!

I think I'm going to write a letter to as many politicians as possible. Maybe they will change the laws. It needs to be done. We should all work together to get someone to listen to us.

Well..... I don't know if anyone was interested in all that info but I feel really good now that I have a plan!

GOOD LUCK TO EVERYONE!

[Enough Already]

ORNV3,

That's great news! I'm so glad you were able to get some answers, and peace of mind from your meeting with the attorney. It feels great to have a plan!

We have our meeting with the asset protection attorney next week. I can hardly wait. I've been driving myself crazy worrying about all the what ifs. He'll also be able to tell me what to do with our savings (as we've been discussing in the: should we put our $$ under the mattress thread).

I'll be sure to keep you posted. I'm looking forward to having a plan too!

[The Professor]

I want to respond to the quote below and suggest that while it may well be true that few lenders move forward with obtaining a "deficiency judgment" against a borrower, in a situation where a 2nd lender is foreclosed out by the actions of the 1st lender in completing the foreclosure process, the 2nd lender is not going after a "deficiency judgment." Instead their action is simply filing a complaint based upon a default in an unsecured loan, just like a credit card company would do if you stop making payments on your Visa or Master Card.

Daniel

Originally Posted by ORNV3

Hey Enough Already,
I've been doing a TON of research on deficiency judgements and did run across that article earlier. Take a look at this one by the same author.

I have often written about mortgage deficiency judgments pointing out that up to now few institutional mortgage lenders are pursuing deficiencies in Florida. Borrowers should distinguish between personal liability on first and second mortgages. When either the first or second mortgage holder forecloses the first mortgage will likely take back the property. The first mortgages gets land which eventually can be sold. The second mortgage holder gets nothing at the foreclosure sale. If the first mortgage holder pursues a deficiency judgment (and again, this is usually not the case), the borrow can defend the action in part by arguing that the mortgagee has been satisfied by its repossession of the property. The borrower does not have this defense against the second mortgage. The second mortgage, having received nothing of value in a foreclosure, can sue on the mortgage note. The second mortgage can simply demand repayment of the promissory note underlying the mortgage without going through a foreclosure proceeding. The property value is irrelevant when the lender sues to collect the note.


I have not seen any case to date where a first or a second mortgage lender has sued the homeowner personally. I think the risk of personal liability is significantly higher when there are more than one mortgage obligations. It is also more likely that a second mortgage lender who does not foreclose can wait up to five years to bring suit on the underlying note after the first mortgage lender’s foreclosure action is complete.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida






I think we need to worry about the second mortgages. They aren't going to get anything. Hopefully they will settle.

However, for someone like me..... I have hardly any money left now. My second is for $95000. Say they will settle for 10%. That's $9500! I don't have it and won't for a long long time. BK would cost me $1500 at the most. Credit will be ruined either way so I don't know why I would want to settle it.

[kymburley]

Originally Posted by Enough Already

Hi ORNV3,

I read that one too. Scary for sure. You're right, your credit will be ruined either way. Since you have no other debt a $9500 settlement might be worth saving yourself the BK. They might let you make payments. BK will stay on your record for 10 years.

What I discovered many years ago is a bankruptcy shows up on your credit for 10 years and ANY OTHER DEROGATORY reportings stay on for 7 years. Only through time do those items not affect the score as they did when it was first put on your report.

During my short sale in January HSBC (2nd mtg) was willing to settle with me. There was going to be something like $53k outstanding, I offered $3,000 and they accepted. So, we owe $80k, they were walking away with $27k, and I offered $3k. I think they would have accepted $1,000, but I just told them what I could pay and I could pay no more and they accepted. But, before they accepted, their terms were offer a settlement and hope we accept or you're signing a prommissory for the difference to be paid back over 20 years at 0% interest. The settlement amount had to be paid in full at closing. No payments accepted.

[Enough Already]

Hi Kym,

That's great that the lender settled with you for $3K! I'm hoping hoping to work something like that out with our lender when the time comes.

It seems in many cases they will offer payment plans, as you mentioned (20 year note with 0%), but your approach seems likes a great way to handle it.

Tell them what you have to give and they can take it or leave it. You don't know if you don't try.

Good to know - thanks!

[kymburley]

Here's the risk with trying a short sale: if it doesn't close after the mtg co approved they get real pissed. They say things like I'm closing this file and then two weeks later you get a letter from a collection agency demanding a check for $77k. Happened to me 2 weeks ago. HSBC sucks!

[ORNV3]

My question is....
If you are able to work out a settlement with the second mortgage who didn't get anything after the first foreclosed, how will you know for sure that it is taken care of and they aren't going to continue to come after you in the future for more??? I'm assuming that I would need to talk to an attorney about this if I could get something worked out to make sure it was a done deal. What kind of attorney would this be? Any ideas? This whole world of attorneys and law suits and collections is totally new to me. Thanks!

[kymburley]

I can't keep dumping money into attorneys, but since the debt will become personal like a visa, I will require the agreement to be in writing, signed, and delivered to me before I make payment. Part of the agreement in writing will be that the debt is settled in full and all collection activities will cease. I will then make the payment and require a receipt. Then these papers will have to be saved for the rest of my life because these jerks will continue to sell the debt and some idiot will try to collect on it 15 years later.

[ORNV3]

Professor Shays,
I'm wondering if you can outline how you think walking away in a recourse state will play out. Assuming the second mortgage will get nothing at all. What kind of time frame do you think we're looking at? Also, when would be a good time to try to settle the second? Do we need to wait for the first to finish the foreclosure and the sale or should we try sooner? How would we even go about offering a settlement? I know that you told me before that the treat of bankruptcy can be very useful. I'm currently 1 month behind on the first and 2 months behind on the second. I really appreciate you're advice and I know that other people reading this thread will benefit as well. Thanks again.

[kymburley]

adding to previous post:

Fast forward to 2007 and Sears comes back demanding payment + fees, etc. Apparently, even when you bankrupt your creditors sell the bankrupted debt to collection agencies. It's sick, sick, sick. What's worse, people are paying these collection agencies because they are so aggressive and the person who went bankrupt just wants it to stop, so they pay.

[kymburley]

ok. the 2 minute rule kind of is a problem here.

I was telling a story of when my husband went bankrupt in 1995 and bankrupted Sears. Then in 2007 got a letter from a collection agency to pay up.

[The Professor]

Originally Posted by ORNV3

Professor Shays,
I'm wondering if you can outline how you think walking away in a recourse state will play out. Assuming the second mortgage will get nothing at all. What kind of time frame do you think we're looking at? Also, when would be a good time to try to settle the second? Do we need to wait for the first to finish the foreclosure and the sale or should we try sooner? How would we even go about offering a settlement? I know that you told me before that the treat of bankruptcy can be very useful. I'm currently 1 month behind on the first and 2 months behind on the second. I really appreciate you're advice and I know that other people reading this thread will benefit as well. Thanks again.

Let me see if I can provide a complete answer to your question. The key determining factor is more about the borrower's financial condition than anything else. If the borrower is nearly insolvent, the chances are the owner of the second loan (post-foreclosure former secured debt that is now unsecured) is going to be interested in getting "something" without exposing itself to costs incurred in seeking to collect on what is in reality an uncollectible debt due to the borrower's insolvency.

What I know will happen is these second loans will be purchased at deep discounts by entities skilled in both debt collection and asset investigation. The best time for a borrower to make an effort to settle these claims is when they are in their worst financial shape. This is usually early on in the game, generally shortly after the foreclosure sale has been completed. Best when proposing a settlement that the source of settlement dollars be a family member "loaning" the money rather than having the source be the borrower's own assets. That story provides a more convincing cover for settlement, basically helping the collector settle out the claim in a fashion that recognizes they are being taken out by another lender (albeit a relative).

Additionally if you can structure the settlement so that the family member is purchasing the debt for a reduced amount rather than settling it, that way be a way to lessen the impact on the credit report because once that debt is effectively assigned the family member can report that the debt was fully satisfied and paid in full.

I hope this helps. Take care and have a great weekend.

Daniel