Foreclosure is the legal process in which a lender takes possession of the home of the borrower because the borrower has defaulted on payment of their mortgage loan used to purchase the property.
In a state that uses a judicial process, the foreclosure begins with the lender filing a lawsuit to collect on the outstanding debt owed by the borrower. However, twenty-two states allow the lender or bank to initiate a foreclosure without going through a court proceeding. In some states, both processes are available.
After the lender has taken possession of the house and the borrower has left the property, the lender sells the property, sometimes in an auction or sometimes through the conventional real estate market. The proceeds of the sale are applied to paying off the mortgage loan principal and any accrued interest.
In thirty-eight states in the U.S. the property owner remains liable for any deficiency, i.e. any amount of the loan that is not paid by the proceeds from the sale of the property. In these states, the lender can file a suit against the borrower to recover the amount of the loan that is left unpaid by the sale of the property. The lender can obtain a deficiency judgment, with which the lender can pursue the borrower’s assets other than the property that was security for the loan to satisfy the loan deficiency.
Foreclosure obviously affects the borrower’s interest in the property that is lost to the borrower through foreclosure. But, it can also have an impact on the borrower’s other assets, if there is a deficiency judgment. That is because the lender who has a deficiency judgment can pursue the other assets of the borrower to satisfy the judgment.
Other assets affected may include the following:
- Other Real Property;
- Personal Property: A lender might obtain possession of a motor vehicle;
- Wages: A borrower’s wages might be garnished;
- Bank accounts.
Another option that a homeowner has in the event they cannot make their mortgage payments is a short sale. In a short sale, the lender, a bank or credit union, allows the homeowner to sell the home for at a price that is less than the principal balance of the mortgage. Even in a short sale, the lender may still hold the seller liable for any deficiency if the law of the state in which the property is located allows it. But a foreclosure is avoided, which can help the borrower’s credit rating.
If the borrower has a second mortgage, the seller also may be liable to the lender for the second mortgage for any deficiency, that is, either all or a part of the balance of a second mortgage that remains unpaid after a foreclosure sale. Lenders have to approve a short sale and reportedly may take longer than is strictly necessary to assess short sale requests. Additionally, there could be income tax consequences to a short sale, so borrowers may want to consult with a tax advisor before deciding on a short sale..
If a property does not sell at a foreclosure auction or the lender has not otherwise sold it, the lender may take ownership of the property and then sell it through their own process for selling foreclosed properties.The lender may add it to their portfolio of foreclosed properties, also called real-estate owned (REO) property.
REO properties may appeal to real estate investors and others, because lenders may sell them at a price that is below their true market value. Of course, this may negatively affect the lender and the borrower as well, because it may leave a deficiency for which the borrower is liable.
A foreclosure appears on a borrower’s credit report within a month or two after the borrower fails to make a mortgage payment and remains there for seven years after the date of the first missed payment. The foreclosure is removed from the borrower’s credit report after seven years.
How Can a Lender Get to My Other Assets?
There are essentially three ways in which a lender can obtain the assets of a borrower who owes a deficiency on a mortgage loan after foreclosure in the states where the law allows this. They are foreclosure on a lien on personal property, wage garnishment and a bank levy.
One way for a lender to get access to assets other than the borrower’s real property is through a judgment lien. A lien is a court order that gives a lender a specific claim against the property of a debtor. After a foreclosure, a lender can take their deficiency judgment and use it to have a court place liens on the personal and real property of the borrower who has a deficiency. A lien gives the lender an ownership interest in that property subject to the lien.
This not only includes homes or undeveloped land, but also such assets as:
- Motor vehicles and boats;
- Business assets;
- Certain trusts;
- Valuable jewelry, art, and nearly anything else of value that is worth the effort of the lender.
A sheriff can take possession of the personal property of the debtor and sell it to pay a deficiency judgment. As for real property that is not the property the borrower bought with the mortgage loan, the lender can place a lien on the property and then when the borrower sells it, the lender can take the portion of the sale proceeds that is needed to satisfy the lien.
A lender with a deficiency judgment against a former property owner may also petition a court to garnish the mortgage borrower’s wages. However, wage garnishment is limited. Generally, under federal law a lender or other creditor may not take more than either 25% of the debtor’s disposable earnings or the amount of their weekly wage that exceeds thirty times the federal hourly minimum wage rate, whichever is less.
A creditor who has information about a borrower’s bank accounts may effect a levy on the funds in those accounts to fulfill the creditor’s judgment. A bank levy essentially gives a creditor access to the funds in a debtor’s bank account to satisfy the unpaid balance on a debt including a mortgage loan. deficiency
Can I Protect My Other Assets?
There are several measures that debtors can take to protect the assets they have. A deficiency judgment is an unsecured debt, and therefore either Chapter 7 or Chapter 13 bankruptcy are options for protecting a borrower’s other property from the effects of a foreclosure.
Additionally, every state has a list of exemptions from debt collection, and those suffering from severe financial hardship may qualify as “judgment proof.”
Seek Legal Advice
If you are facing foreclosure or have already gone through the process, an experienced foreclosure attorney may help you protect your other assets. Consulting an experienced mortgage lawyer in your area is the best way to ensure that mortgage lenders and other creditors do not take advantage of you.
The law in most states places limits on which items of your personal property a lender or other creditor can seize or otherwise use to satisfy a deficiency judgment. There are options, such as bankruptcy, available for protecting other assets after a foreclosure and an experienced foreclosure attorney can help you make use of them.