Know Your Rights in Deficiency Judgments

It is the dream of every American to own a home someday; for many this dream becomes a complete nightmare. In today's economic climate, homeowners continue to lose their property to foreclosure. As if this weren’t painful and embarrassing enough, the lender can still come after them for the deficiency balance after they foreclose on the home.

A deficiency balance in a mortgage foreclosure is the difference between the outstanding balance due on the loan and the fair market value of the property on the date of the foreclosure sale. For example, if the balance of the mortgage is $200,000 and the fair market value is $130,000, the resulting deficiency would be $70,000. Note that the deficiency is based on the fair market value, not on the ultimate sales price of the home. If the lender sells the same foreclosed home for $100,000, and the fair market is $130,000, the deficiency is $70,000, not $100,000.

In Florida, if you lose your home to foreclosure and the lender chooses to pursue you personally for the deficiency balance, the lender can obtain a lien against any unprotected personal and non-homestead real property you own. 

However, there are exceptions to the rule. The primary concern for many homeowners is the fear of garnishment. In Florida, there are 11 specific exemptions that can be used to protect your income and assets from garnishment after a judgment is adjudicated against you. A few of the most common exemptions are explored below.


1) Head of Family Disposable Earnings

Under Florida law, the “head of family” is defined as any natural person who is providing more than one-half of the support for a child or other dependent (including a spouse or adult parent).  “Disposable earnings” are those earnings remaining after deduction of any amounts required by law. The head of the family exemption provides two classifications of wages: disposable earnings less than or equal to $750 per week and disposable earnings greater than $750 per week.  By law, the first $750 of disposable earnings are insulated and not subject to garnishment for up to six months, so long as the funds can properly be identified as earnings.  Disposable earnings which exceed $750 a week are only subject to garnishment if the head of family properly waives such protection in writing.  Even if proper waiver is made, the disposable earnings permitted to be garnished are limited by the Federal Consumer Credit Protection Act described below.

2) Garnishment Cap

Florida follows the Federal Consumer Credit Protection Act (the “Act”) which places a cap on the maximum part of the aggregate disposable earnings of an individual for any workweek subject to garnishment and holds that such garnishment may not exceed the lesser of: 1) 25% of the disposable earnings for that week, or 2) the amount of disposable earnings which exceeds thirty times the Federal minimum hourly wage.  However, the protection afforded by the Act is subject to certain exceptions, such as garnishments imposed pursuant to orders of support or outstanding tax liability.

 3) Government Benefits (state and federal) and employer/employee based wages and earnings

This broad class of government (state and federal) and employer/employee based wages and earnings includes Social Security Benefits, Supplemental Social Security Benefits, Public Assistance (welfare), Worker's Compensation, Unemployment Compensation, Disability Income, Government Pensions and Veteran's Benefits which are all exempt from garnishment, regardless whether your receipt of funds is electronically deposited in a bank account or in paper check form. When dealing with an electronic deposit, there is one caveat – the funds being received must be able to be distinguished from other funds in your bank account. 

 4)  Retirement or Profit-Sharing Benefits or Pension Plans

To prepare for retirement, individuals routinely invest their money in retirement accounts, including 401(k)s, IRAs and profit-sharing plans. Florida statutes provide that any money or other assets payable to the participant or beneficiary in a qualified retirement or profit-sharing plan are exempt from all claims from creditors. An IRA is protected whether or not it is rolled over or inherited.

 5)  Life Insurance and Annuity Contracts

The cash value of a life insurance policy is exempt from garnishment as well. Essentially, cash value life insurance is a life insurance policy that pays out upon the policyholder's death, and also accumulates value during the policyholder's lifetime. Policyholders can use the accumulated cash value as a fund from which to borrow, as a means to pay policy premiums later in life, or they can pass it on to their heirs. This protection is only afforded to the owner/insured, not the beneficiary of death benefits. If the owner/insured borrows against the policy or surrenders the policy for cash, funds are protected. However, if the insured dies, the proceeds left to the beneficiary are not. 

Furthermore, all annuities issued to Florida residents from a Florida financial institution located within the state are exempt. A current Florida resident who purchased an annuity prior to moving to Florida in another state is not afforded this protection.

 6) Prepaid College Plans

The State of Florida offers a variety of prepayment plans that are free from garnishment. All Florida prepaid college tuition plans and Florida's 529 college saving plans are protected from creditors. The Florida Prepaid College Plan can be used at any of Florida’s 11 state universities and 28 Florida colleges (formerly known as community colleges). If your child decides to attend a private college, out-of-state college or select technical school, prepaid plan benefits may be applied toward any eligible educational institution as defined in Section 529 of the Internal Revenue Code. The prepaid plan will pay the same rate payable under the beneficiary's plan to a public university or college in Florida.

This is just a brief overview of the most common exemptions available if you are subject to garnishment because of a deficiency judgment against you. While they are relatively straightforward to understand, as with anything, if you are concerned that your assets are protected from creditors in the event a deficiency judgment is levied against you, please consult with an attorney.

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