It’s understandable to want to walk away from a house after falling behind on the mortgage—especially when the lender is foreclosing on the property. But the problem might not go away. If you owe more than the house is worth and your state law requires you to pay the entire balance, your lender might continue to chase after you financially. Even so, you have options. If you can’t work something out with the bank, it’s likely that you can wipe out the debt by filing for bankruptcy.
Understanding the Foreclosure Process
In 2014, a new federal law—the Dodd-Frank Act—went into effect that gives homeowners time to apply for foreclosure avoidance programs that can potentially save their home. Now, your lender must wait until you’re 120 days past due before proceeding with a foreclosure. (Learn more about federal laws that protect homeowners from foreclosure.)
After the federal waiting period expires, the bank can begin the process using one of two types of foreclosures:
- A judicial foreclosure must proceed through the court system. It starts with the filing of a lawsuit and ends when the court determines whether the lender can proceed with the home sale.
- A nonjudicial foreclosure allows a foreclosure sale without court involvement after the bank follows steps outlined in state law.
Although each state allows judicial foreclosure, banks often choose the quicker, less expensive nonjudicial option when it’s available. This trend is changing, however, as homeowners receive more rights than they had previously. For instance, in the District of Columbia homeowners can prolong the nonjudicial process by requesting mediation (both sides meet and attempt to find a solution). As a result, more lenders are choosing to foreclose judicially to avoid the mediation process.
After the house sells at a foreclosure auction, the lender uses the proceeds to pay down the mortgage balance. (Learn more by reading What Are the Differences Between Judicial and Nonjudicial Foreclosures?)
What Is a Deficiency Balance?
The proceeds of a foreclosure sale don’t always cover the entire amount owed. The difference—called a “deficiency”—might be collectible, depending on your state law, meaning that you might have to pay it.
Can Your Lender Collect a Deficiency From You?
It depends. Many states are recourse states, which means that your lender can attempt to collect the deficiency balance. In non-recourse states, such as North Carolina and California, a creditor can't come after you for a mortgage balance under certain circumstances. Be aware, however, that the law can be tricky. For instance, although California homeowners don’t have to repay loans used to purchase a residential property, junior mortgages (such as a 2nd or 3rd mortgage) used for other purposes (a vacation or to consolidate bills) remain collectible. Such loans are recourse loans.
Even if your bank can pursue you for the debt, it won’t if it's too expensive to do so. For instance, if you’re judgment proof (you don’t have anything that the lender can get), the bank won’t waste money on collection efforts.
The problem is that there’s no way to guarantee that the bank won’t take action. It might hire a collection agency to badger you into paying, or, if it’s believed that you have substantial assets, get a deficiency judgment from the court. The deficiency judgment allows it to take money from your paycheck by garnishing your wages, or from your bank by levying against your checking or savings account. Your creditor can take your tax refund to pay your debt, as well. (Find out more in Delinquent Debt: What to Expect in Debt Collection.)
Other Problems Could Follow You, Too
Before you leave your home, you should understand the potential liability that remains with you if something happens on your property—and it’s not just the mortgage amount. Suppose a child gets hurt on the abandoned property. As the owner of record, you’ll likely be named in the lawsuit—not the lender. Also, you’ll continue to be liable for the utilities, property taxes, and homeowners' association dues. So it’s not just your lender that will chase you—until the ownership changes from you to someone else, you’ll continue to accrue debt.
You might decide that it’s in your interest to stay until the foreclosure is complete (or shortly before, depending on your situation—an attorney can tell you what’s best). It’s easier to prevent someone from being hurt if you’re on the property, and, if you’re going to continue to incur debt, it makes sense to stay and save on rent payments.
Finding a Solution
Most lenders have loss mitigation programs, like loan modification programs, to help people just like you. So before you walk away, it’s important to know whether your lender will work with you. Sometimes there’s no way to avoid the inevitable, however. If so, you can find out how to wipe out lingering deficiency debt—as well as other bills you might be stuck paying—by talking with a bankruptcy attorney.