Deficiency judgment is a legal suit filed against a borrower to recover the difference between the debt owed and the value recovered after a foreclosure or short sale of a property. Thus, it is the course of action initiated by the lender against a borrower to erase unpaid loans and debts.
Once you start defaulting on loan payments, the lender can reclaim the mortgaged amount via foreclosure or short sale. Once this process is initiated, you lose all rights with respect to the property and no redemption requests can be granted.
Short sale involves selling the property at a lower value than the fair price but for more than what can be gained at the present market price. Foreclosure, on the other hand, involves selling the property to the highest bidder.
How can you combat a deficiency judgment?
1) One method to combat a deficiency judgment is to opt for short sale rather than foreclosure. This is because a foreclosure will give you a bad credit rating. This will prevent you from applying for a fresh mortgage for at least the next five years. The short sale does not reflect as badly on your credit history. With a short sale you can usually apply for a new mortgage after two years. Another advantage of a short sale is that the deficiency amount can be negotiated and possibly lowered.
2) It is important to keep in mind that the lender can file a deficiency judgment against you even if you have signed a deed in lieu of foreclosure. This also applies to promissory notes in the case of a short sale. So, don't get caught by the common misconception that you are exempt from a deficiency judgment because you have signed a deed.
3) The next step is to study the deficiency judgment laws in your state. State laws differ pertaining to whether a lender can file a deficiency judgment. Some states don't encourage deficiency judgment after foreclosure, while some help by holding a bar on the amount being contested. Keeping yourself informed about the law in your state will help you figure out the best way to combat Deficiency judgment.
4) Another step you can take is to get an appraisal done before foreclosure, if the court allows it. In this way, you can check the amount that is levied against you and can file your own suit against it if it is too much. This is potentially a way to get the amount reduced. The thing keep in mind here is the overheads, such as interests, back-payments, and legal counsel fees, which the lender can add to the deficiency amount.
5) Hire a good debt negotiator to deal with the lender. These people are professionals and have expertise in these matters. A good negotiator can help to significantly reduce the deficiency amount being claimed. In some cases, the amount can be brought down to a percentage of the total debt owed.
Do not become alarmed when you are faced with a deficiency judgment. Instead, try to work out the ways in which you can combat it.
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