Distressed homeowners struggling to reach a resolution with their lender through short sale negotiation or loan modification often become frustrated and impatient with what may be a complicated and lengthy process. Borrowers may become tempted to accept defeat and simply walk away; allowing their lender to take their home through a foreclosure lawsuit.
At first glance walking away might seem easier than fighting a big bank. However, many borrowers who contemplate throwing their keys on the front step of their lender’s local branch fail to consider the post-foreclosure implications. Florida, unlike some states, allows lenders to pursue the remaining balance owed on a mortgage loan after completion of a foreclosure sale. This is known as a deficiency judgment. Deficiency judgments are awarded by the court and permit the lender to impose liens on property, levy bank accounts, and garnish wages of the borrower for up to 20 years. In addition, penalties, attorney’s fees, collection expenses, court costs, and default interest will continue to accrue while the foreclosure is pending. The result is that the outstanding balance of the loan is typically higher than it would have been at the end of a short sale; and there was no opportunity to reach a settlement, so the resulting deficiency judgment balance is larger.
At the conclusion of a foreclosure, a deficiency judgment is automatically awarded and enforceable, whereas a lender’s pursuit of a balance remaining after a short sale would require the lender to file an action with the court to seek the necessary judgment. In many short sale negotiations, lenders are willing to settle the remaining balance for a fraction of what is owed, or waive the balance completely.
The existence and enforcement of a deficiency judgment is likely to have a greater overall impact on a borrower’s credit since the judgment will continue to be reported until it is satisfied. Enforcement and satisfaction of the deficiency judgment could conceivably take years and Florida permits a generous amount of time for lenders to do so. In extreme cases, lenders have pursued and enforced judgments almost twenty years after entry.
As frustrating as short sale and loan modification negotiations may be, a complete understanding of what a borrower may encounter following a foreclosure makes the foreclosure option much less attractive. Before throwing in the towel, distressed homeowners should strongly consider the potential consequences of a deficiency judgment, the collection methods to enforce such judgment, and recurring credit damage that may result from their choice to walk away.
So you’ve decided not to walk away….what’s your next step? Read next week’s blog post – Short Sale Process and Your Credit Matters
