Consumers with foreclosures in California now have protection against lenders, who are forbidden to state on a credit card, for example, that a deficiency is owed, or to collect a deficiency. According to current law, short sale lenders are forbidden to claim that a deficiency is owed, or to collect a deficiency.
The law in California is applicable to loans that are subject to foreclosure by a trustee’s sale, as well as loans secured by various properties, including:
- Purchase-money (loans that were used to pay all or part of the purchase price of the property); this subdivision of the new law only applies to credit transactions entered into on or after January 1, 2013.
- One-to-four residential units
This includes no cash-out refinances, which are transactions in which the new mortgage is restricted to the addition of the remaining balance of all current mortgages, closing costs, and any discount points.
However, a lender can pursue a deficiency judgment against a guarantor or another surety, an example of which is a mortgage insurer. A lender also has the option to pursue different security for a loan that is cross-collateralized, which means that the collateral for one loan is used as collateral for another loan. The new law is contained within Senate Bill 426, which is codified as Cal. Code of Civil Procedure §580b, and is effective as of January 1, 2014.
Prior to the existence of the new law, creditors and debt collectors were able to contact borrowers, and engage in harassing behavior towards the borrowers after foreclosure in an effort to collect the debts in a non-judicial manner. According to the creditors and debt collectors, the debts remained due even if they could not be collected in court.
Furthermore, they reported the deficiency on borrowers’ credit reports, thereby making it very challenging for borrowers to improve their credit rating following a foreclosure. The new law would forbid creditors and debt collectors from engaging in such tactics in order to collect a deficiency, in which case borrowers facing foreclosure would have a better chance of rebuilding their credit.
If you are facing foreclosure of your home, and are being contacted by creditors or debt collectors for a deficiency, you should consult a foreclosure attorney who can advocate for your right to be free from such harassment.