Limiting Liability
Bankruptcy Eliminates Any Deficiency Judgment
While lien stripping and curing arrears can help many people, there are others who can no longer afford their mortgage payments or are otherwise letting their home go because it is tens or hundreds of thousands of dollars underwater (i.e., strategic default). If this is you, you must be aware of the risk of a deficiency judgment and understand how bankruptcy can help manage this risk.
Whether your home goes into foreclosure or you get rid of it through a short sale, you are likely going to be liable for a sizable portion of the mortgage afterward. This is because, after a foreclosure or short sale, you usually remain liable on the note you signed when you purchased or refinanced your home. When the home short sells or is sold in foreclosure, the proceeds are generally insufficient to pay you’re your liability on the note. If you have a second mortgage or HELOC, then you are basically guaranteed to exit the foreclosure or short sale still owing the full amount of the second mortgage or HELOC.
In most states, including Colorado, you remain liable for the difference—the deficiency—between what you agreed to pay by contract and what the lender received through the sale. For example, if your mortgage is for $300,000 and the property sells at foreclosure or short sale for $250,000, you are still liable for the $50,000 your lender is owed under your mortgage contract, unless they agree to let you off the hook IN WRITING which almost never happens.
At this point, the lender can sue you to collect on that amount. After the lawsuit, the amount gets converted into a judgment against you, a deficiency judgment. And in Colorado, the holder of a deficiency judgment can garnish your wages – 25% of your wages, to be exact. They can also wait six years under the statute of limitation to start the lawsuit. That means they can sit back and wait to see if you start earning more money before they decide to sue you.
Bankruptcy wipes out your personal liability on the note(s) on your home. That means that whether you file for bankruptcy before or after foreclosure or short sale, the lender cannot pursue a deficiency judgment against you after bankruptcy. If you file for bankruptcy after the deficiency judgment is obtained, the bankruptcy can still wipe out your liability for the judgment. Bankruptcy can even stop the garnishment if the lender has proceeded to that level.
If you are pursuing a short sale or facing foreclosure of your home, we urge you to contact us today for a free consultation so you can fully understand the benefits of using bankruptcy to prevent or wipe out any possibility of a deficiency judgment in your life.