subject: Six Defenses To Mortgage Deficiency Judgment Claims [print this page] Six Defenses To Mortgage Deficiency Judgment Claims
According to Realty Trac, a leading housing industry research firm, nearly 2 million foreclosures will occur in 2011 and likely will continue well into 2012. With so many facing foreclosures, distressed homeowners will likely be faced with the decision to just walk away from the property, especially given the fact that a substantial number of foreclosures are caused by loss of income due to unemployment. Under such circumstances homeowners cannot even qualify for a Home Affordable Modification Program (HAMP) to avoid foreclosure. In almost every foreclosure scenario the home is in a position known as being "under water". This means the home's value is less than what is owed on the property. Foreclosing on such a property leaves a difference between what the mortgage loan balance is and what the foreclosing property actually sold for. This difference is known as a deficiency. When there is a deficiency a lender has the option to go after the homeowner for the amount of the deficiency by filing a claim in court. If successful, the judgment rendered by a court in favor of the lender is called a "deficiency judgment". Once obtained, the lender can seek to enforce the judgment by attaching any asset of the homeowner that is not exempt by law. Therefore bank accounts, personal property, accounts receivable and the like can be taken by the lender. In addition, the lender can file a copy of the judgment with the county recorders office within the county where the homeowner resides and the deficiency judgment will act as a cloud or bad record against the homeowner so long as it remains on the county records. This could hinder the ability to purchase another property or transfer any other property that the homeowner might otherwise own. It could also affect the homeowner's ability to receive property free and clear as a gift or inheritance. When involved in a foreclosure, homeowners are not without defenses to a deficiency judgment and armed with proper knowledge need not fear a deficiency judgment and can in fact defeat such a judgment. Here are six defenses that can be deployed against a deficiency judgment. 1. The Mortgage Forgiveness Debt Relief Act: Under this law, enacted in 2007 and now extended to 2012, homeowners who lose their principle homes (the house they actually live in) to foreclosure and thereafter face a deficiency cannot be held liable for any deficiency judgment. The amount is automatically written off. The homeowner cannot be held responsible for such debt. Any lender seeking to enforce a deficiency judgment in such circumstances would be acting illegally and the homeowner would not only have a complete defense, but a right to counter sue the lender for abuse of process or other appropriate claims. 2. Properties Foreclosed On That Are Not A Principle Residence: Many foreclosures taking place are on homes that are not the principle residence of the homeowner. The Mortgage Forgiveness Debt Relief Act would not protect against a deficiency judgment in this case. A homeowner should negotiate with the lender under such circumstances and seek a written agreement that the lender will not seek a deficiency judgment in return for the homeowner just walking away and giving up any legal right the homeowner may otherwise have to file a claim against the lender. In the current state of affairs lenders are facing numerous claims of fraud, failure to follow foreclosure regulations and other bad faith claims. Such claims have value and can be used to negotiate with the lender to not seek a deficiency judgment. 3. IRS Tax Collection Defense: Rather than seek a deficiency judgment a lender may simply write the deficiency off its books and then issue a 1099c to the homeowner showing the amount of the deficiency. Under IRS rules this reporting is the same as income to the homeowner and taxes must be paid on the amount. This is devastating to a homeowner who has already lost the property through foreclosure because payments couldn't be made and now must face a tax debt. A defense against such a claim by the IRS is a claim that the homeowner is "insolvent" meaning there is no money from any source that can be used to pay such a tax. The law provides protection under this insolvency exclusion. Homeowners facing attempts from the IRS for collection purposes should seek advice from a competent CPA or Tax Attorney. 4. Home Affordable Foreclosure Alternative Program (HAFA):The federal government has a program whereby it encourages homeowners to apply for and seek a short sale of property in foreclosure rather than go through the foreclosure process. The amount of any deficiency is what constitutes the short sale (selling short of what is actually owed). Once a homeowner makes an application under HAFA the new rules taking place on February 1, 2011 require the lender, once application is made by the homeowner, to stop the foreclosure process and respond with an approval of the short sale within 30 days from the application or to make a counteroffer on the short sale of the home within that same period of time. Homeowners using HAFA can be protected against any deficiency judgment and should review the requirement of the program as one defensive option when facing foreclosure. 5. State Regulations and Rules Governing Deficiency Judgments: Some states, in efforts to protect its homeowners facing foreclosure, have passed new laws that cover not only principle places of residence but investment properties also. Homeowners living in those states are relieved from liability for any deficiency judgment on first trust deeds on properties foreclosed on. California is one such state that has recently enacted such a law under SB 931. Homeowners should check their state foreclosure laws to verify whether similar protection exists in their state. 6. Bankruptcy! The Death Blow To A Deficiency Judgment: If all else fails, a homeowner facing a deficiency judgment can file a petition in bankruptcy under Chapter 7 of the Bankruptcy Rules. In a Chapter 7 bankruptcy all unsecured debt is wiped out, with very few exceptions. A deficiency judgment becomes personal and against the homeowner and is no more than an unsecured debt. Therefore, it can be extinguished in bankruptcy. Often time lenders assign or sell deficiency judgments to debt collectors. A bankruptcy would wipe these claims out too.Homeowners facing deficiency judgments or the possibility should keep these six defenses in mind. Using any of these defenses however should be discussed with an experienced attorney before attempting to implement them.
