Deficiency Balance

The real estate boom is long over, and with its promises of quick real estate flips and low variable rate interest loans comes the after math. A record tidal wave of foreclosures on both investors as well as home owners has occurred, and with those foreclosures, many of the values were not enough to cover the value of the loan. Suing for deficiency balance is the bank or lender’s only recourse against the borrower after the sale by means of either foreclosure or short sale, and this is a process that is important to understand.

This type of lawsuit may be brought against a borrower any time that the sale proceeds are not enough to cover the initial loan amount. This may occur after either a short sale as well as a foreclosure. The bottom line is that the home owner or borrower is usually responsible for this amount.

First of all, most lenders will not waste their time in pursuing this type of action if it does not represent much money. Different institutions maintain different thresholds to identify amounts that they consider significant, but few lenders will pursue a judgement for only a few thousand dollars. Also, in the case of a foreclosure, these actions are not often undertaken because lenders do not want to incur the expense of bringing this suit only to have their borrower file for bankruptcy, which is usually what happens.
After a short transaction is the most common time for this type of action to occur. This is because someone negotiating this process is still trying to work out a deal because they wish to save their credit. In that case, a borrower will not be so quick to file for bankruptcy.

A short sale is a transaction in which borrowers are not able to make the payments and the property is not worth what is owed against it. The bank has only to options which are either to foreclose or accept less money. A foreclosure can be costly to the lender because it can take six months or much longer in many cases.

If the bank chooses to fore go the expense and time of pursuing the foreclosure process and accepts the short sale, then a borrower may still owe them the amount of the difference. The best chance the borrower has to escape this debt is by making it a condition of the short sale. The borrower or his attorney may stipulate that the short transaction constitutes payment in full and no deficiency judgment will be pursued against the borrower.

If such a lawsuit is filed, then the borrower must defend against it. He must prove in court why he should not be expected to pay the bank back for what they loaned him. He will need a lawyer, and his best defense is probably to show that the original loan process had some kind of error in it in some way.

He may point to a faulty appraisal, or some kind of fraudulent mortgage. If a mortgage broker was involved and the loan was sold to the lender that foreclosed, he can prove that the loan was made falsely, and then the lender must pursue suing for deficiency balance against the originator of the loan. These are not easy lawsuits to defend, and experts agree that one should hire experienced attorneys to handle this matter.