There are three alternatives that can arise from the auction of a property at a foreclosure sale:
- The property is sold to the highest bidder or,
- The lender takes the property in full satisfaction of the debt or,
- The borrower redeems the property by paying in full at auction.
• "Forty-one states and the District of Columbia permit lenders to sue borrowers for mortgage debt still left after a foreclosure sale."
Principles and Strategies For Dealing With Deficiency Debt
- It takes patience, perseverance, and hard work to prepare a proper deficiency debt defense. In addition to your own personal research and information gathering, you should seek the advice of a competent attorney and tax advisor. The attorney will provide you with an overview of the legal risks and strategies. The tax advisor will discuss any tax obligations that may arise from deficiency debts.
- Read the ever evolving Principles of Debt Defense. These principles require action. If you commit to the action, you will see positive results.
- Keep in mind that it is difficult to defend a deficiency lawsuit. It is a straightforward lawsuit that can lead to a lender obtaining a deficiency judgment once the lender can successfully prove its case in court. A deficiency lawsuit is based upon a borrower’s signed written agreement (aka Promissory Note or Note) to be personally liable for the loan. Generally, if a lender or assignee of the loan can establish 1.) that it actually owns the loan, 2.) that an actual amount of money was loaned to the borrower, 3.) that the borrower signed a document agreeing to pay the loan (aka Promissory Note or Note) to the lender, and 4.) that the borrower stopped making payments on the loan then it becomes almost impossible for a borrower to successfully claim "I didn't borrow the money from the lender and I don't owe the money". An assignee of the loan is any other person or entity, other than the original lender, that has become the new owner of the original loan.
- Fight, fight and fight. Just because a deficiency lawsuit is tough to defend does not mean you should not defend it. You should never make it easy for the lender to get your money. A strong defense can either prevent the collection of the debt or can lead to a reduced settlement of the debt. It can provide you with time to gather your resources so you can pay the lender in full. It may even lead to a loan modification.
- Make an attempt to settle the debt with the lender before it turns into a lawsuit. In many instances lenders are willing to accept settlements of ten cents to fifty cents on the dollar. In fact you will increase your wealth with the successful settlement of a debt. For example, let's say you borrow $100,000 and you make an agreement with the lender to settle the debt for $15,000. This leaves an unpaid balance of $85,000. In most settlements, the lender will agree to forgive the unpaid balance which in this case is $85,000. States and the IRS have created rules regarding forgiven debt. Normally forgiven debt is considered taxable income. In some instances the IRS does not tax forgiven debt. However let's say that there is a tax on the $85,000 in forgiven debt. Let's say the total tax due to the IRS and the State is $20,000. Now Do The Math! If you borrowed $100,000 and paid $15,000 to satisfy the entire debt and $20,000 in taxes for the forgiven portion of the debt you legally made $65,000 ($100,000 less the $15,000 settlement and the $20,000 tax).
- Focus your energy on settling second mortgages and/or HELOCs. Most lenders that provided second mortgages and/or HELOCs are not counting on receiving money from a foreclosure sale. If the lender wants to recover money then there are two options. The lender will sue or the lender will settle. In fact, anyone considering a strategic default must make settlement of a second mortgage and/or HELOC a top priority. Even if the primary first mortgage loan is in default or foreclosure, you must put resources towards settling second mortgages and/or HELOCs. The total amounts due by a borrower on these types of loans can be significantly high. I have seen outstanding balances range from $80,000 to $500,000. If second mortgages and/or HELOC’s are not settled or resolved it will cost you in the years to come. This principle applies to business loans and credit cards.
- Understand the risks and benefits of a short sale, deed-in-lieu, or foreclosure sale. A properly negotiated short sale or deed-in-lieu never exposes a borrower to a deficiency judgment. A foreclosure sale can expose a borrower to a deficiency judgment. A short sale is when a lender agrees to allow a home owner to sell a property for an amount less than what is owed on the mortgage loan. The key to a successful short sale is to enter into a written agreement wherein the lender agrees to forgive the deficiency. Keep in mind that some lenders may require a cash contribution from the property owner in order to forgive a deficiency that arises from a short sale. Chase, Wells Fargo and Bank of America are offering "qualified" homeowner's cash incentives, up to $35,000, to complete a short sale. If you are interested in a short sale, you should ask your lender if you qualify for a cash incentive. A deed-in-lieu is when you enter into a written agreement to give the property back to the bank. The key to a successful deed-in-lieu is to negotiate a full settlement of the total outstanding mortgage debt, including fees and penalties, in exchange for the deed to the property. A full settlement of the total outstanding mortgage debt eliminates any deficiency and any tax liabilities. A partial settlement still leaves open the possibility of a deficiency judgment or forgiveness of the remaining balance.
- Once a lender or creditor obtains a deficiency judgment it can remain effective for as long as 20 years in some states. This raises a critical issue for strategic defaulters. It is common knowledge that most strategic defaulters stop making loan payments despite having the money to make the payments. Strategic defaulters generally have savings, assets, and income. Therefore third party debt collectors, who purchased debt for pennies on the dollar, can afford to wait 3 to 5 years years to collect and still make a sizable profit. This means resolve and/or settle the debt as soon as possible.
- Bankruptcy is not a bad word. It is a financial tool. The purpose of filing for bankruptcy is to assist the borrower in controlling the payments of outstanding debt and to give a borrower a "fresh financial start". It essentially puts creditors on freeze until a borrower can re-organize his financial assets. As time goes on bankruptcy will lose its negative social stigma as more people realize it can be an effective solution to their debt issues. The best way to approach bankruptcy is to understand what it can and cannot achieve. The United States Federal Courts has created an informational website that provides "Bankruptcy Basics". You can also seek the advice of a qualified bankruptcy attorney.
- Start to practice the principles of asset protection, right now. Simply put, asset protection is the implementation of legal structures, techniques, and strategies that protect and preserve what you earn, what you create, and what you acquire. Asset protection will help you create defensive and offensive strategies against any individual or entity seeking to get their “hands” on your assets. For a basic introduction about asset protection please read our link Protect Your Assets by Kenneth F. McCallion, Esq.
- Follow the principle Never Keep All of Your Money In The Same Bank. This means that if you owe Citibank money then you should not maintain any savings or cash accounts, including business accounts, with Citibank. In our current technological age, all it takes is a social security number and a push of a button to obtain financial information connected to the social security number. Don’t be fooled. Lenders and creditors will never admit to having access to this info yet in reality they do.
- Deficiency debt grow likes a vine. It is easy to ignore the growth cycle of a vine. Initially we see the vine growing up the tree, fence, or house. Since it is slow growing we really don't pay attention. Then one day the vine has covered a large section of the fence or the entire side of a house. A vine will continue to grow unless it is taken out by its root. The way to stop the growth of debt is to resolve it at its root cause. In other words, resolve debt by permanently eliminating the debt, settling the debt, paying all of the debt, or modify the debt.