Deficiency Judgments Susan Francis Maryland Volunteer Lawyers Service

What is a Deficiency Judgment? Deficiency A deficiency is the difference between the principal balance due and the amount received, providing the amount received is less than the amount owed.

What is a Deficiency Judgment? Judgment Court process – issues a judgment in favor of the bank against the former homeowner for the deficiency amount. Can include costs associated with the foreclosure (including the unpaid interest, unpaid property taxes and attorney fees) Another reason to ensure the accuracy of all amounts claimed in addition to the monthly arrears Judgment is personal – in that it’s connected to the individual homeowner As a result, the judgment can be used to garnish wages or seize funds from bank accounts

Who is at Risk of Deficiency Judgment? Foreclosure - difference between the amount the bank purchased it back for (or a third party purchased it for) and how much money the homeowners still owed on their mortgage. Example - Total debt owed on the first mortgage is $200,000, but the home only sells for $150,000 at the foreclosure sale. The deficiency is $50,000. Short Sale - difference between the amount the house sold for and how much money the homeowners still owed on their mortgage. Deed in lieu - difference between the fair market value of the property and the total debt. To avoid a deficiency judgment, the agreement must expressly state that the transaction is in full satisfaction of the debt.

Which Investors Issue Deficiency Judgments? General notion – Servicers only go after strategic defaulters, those people who are current on their mortgages but decide to walk away from a property because its value has sunk so far below their loan balance they have no hope of recouping the loss. Fannie & Freddie criticized for not pursuing enough deficiency judgments Servicers won’t go after those that have been through foreclosure because of financial hardship because they don’t have the assets or income needed to satisfy a deficiency judgment But, we get calls from individual with deficiency judgments What will be their financial picture in 3 years?

Will the Service Issue A Deficiency Judgment? ? Simply, there is no way of knowing. Exception – a deed in lieu, where terms addressing this can be included in the agreement.

When Will the Homeowner Receive a Deficiency Judgment? Old law The timeline was a bit undefined. Servicers had either 3 or 12 years (if under seal) to pursue a deficiency judgment. With the ability to renew the judgment for a second matching period of time. New law Takes effect July 1 Secured party may issue a deficiency judgment within three years of the final ratification of the auditor's report following the sale. Clarifies that this new limitation will apply to a owner-occupied residential property (determined at the time an Order to Docket is filed). Retroactive protection for homeowners that have already had their houses sold at foreclosure or will have them transferred prior to July 1, by limiting the time period to the shorter of 12 years or July 1, 2017.

What Options Do They Have? Bankruptcy Judgment plus accruing interest It will discharge the deficiency judgment liability But: Is the person eligible to file? Different timelines for past bankruptcies, but can be up to 8 years When is the best time to file? Wait until a deficiency judgment is issued? It may not be issued. If wait, then will wreck credit just after rebuilding has started Waiver of Deficiency

To Waive or Not to Waive? The IRS problem - Possible income tax consequences. The general rule is that when a lender forgives or cancels a debt the borrower can incur income tax on the amount of debt forgiveness. Homeowner receives a tax form 1099 telling the IRS that you have imputed income for the amount of debt reduction. Insolvency exception may apply but it may not

The Mortgage Forgiveness Debt Relief Act of 2007 states that homeowners will not be subject to income tax from release from mortgage liability if and to the extent the mortgage proceeds were used to buy or improve their primary residence The Mortgage Forgiveness Debt Relief Act of 2007 Expired Dec. 31, 2013 Has not yet been renewed Doesn’t apply to refinance mortgage debt where funds were used for something other than to purchase or improve residence.

Other Complications 1099-C – cancellation of debt doesn’t always mean deficiency is waived Servicers are issuing 1099-Cs (incurring tax liability for individual) and then pursuing judgments for deficiency “IRS has been abundantly clear that issuance of a 1099-C is not inconsistent with ongoing collection activities.” National Consumer Law Center May be a violation of the Fair Debt Collection Practice Act

What Should You Tell A Homeowner About Deficiency Judgments? Alert them that they may have a deficiency judgment issue, and that they should seek legal advice Refer them to a legal partner Do not provide any recommendation on whether they should pursue a waiver or not They will need specific tax advice