One of the greatest fears that homeowners in foreclosure experience is that the problem will never end and the bank will sue them even after foreclosure and go after their wages, retirement accounts, or other assets. Many of them fear a deficiency judgment by the bank, which is a separate judgment after the house has been auctioned off but did not sell for enough to pay off the total amount owed to the lender.
However, the bank can not go after a homeowner’s retirement funds or any other assets after a foreclosure unless they get a deficiency judgment against the former owners. For this to happen, a number of other requirements need to be met, including following the state foreclosure laws, the house selling for less than the amount owed at the time of auction, and the bank seeing some reason to keep pursuing more assets.
First, the state in which the property is located has to allow deficiency judgments. The bank can not get one against a homeowner if the state foreclosure laws do not allow it. This is why one of the first steps in evaluating what can be done to stop foreclosure is for homeowners to look up their state laws to make sure they understand what is allowed and what is not. Banks often cut corners and threaten to do things that they are restricted from doing, so homeowners need to educate themselves to ensure they have the right information.
Second, the property will have to sell at auction for less than the total amount owed on the mortgage. Of course, with tons of interest, late fees, attorney and court costs, the bank will certainly have added tens of thousands of dollars to the total balance by the time of the sheriff sale. Thus, it is pretty much a given that the house will be auctioned off for less than what the owners are responsible for on the loan.
Third, even if the state allows it and the property sells for a low enough value, the bank will still have to initiate another lawsuit against the homeowners. It has to prove that the property sold for too little and that the former owners now owe them more money. After the mortgage company has already lost money on the original foreclosure, it is probably not worth it for them to sue again to obtain another uncollectible judgment.
But even if they do all this, they still can not go after certain accounts like retirement assets — that includes 401(k), 403(b), and IRA accounts. These are protected from creditors’ attempts to seize them. The bank will have to try and go after the homeowners’ personal bank accounts or wages or any other assets they might still own. But even with this, illiquid assets are not very good targets. The bank does not want to repossess cars or foreclose on another house, because there is little chance they will get anything for their troubles.
So, practically, the bank will not be able to target certain assets even if they obtain a deficiency judgments. Retirement accounts, even if they are held in an IRA, and certain other assets are protected from seizure. And even though the lender can try and go after the homeowners’ other assets, there is a good chance that these assets are not worth enough for the the bank to use the time and resources to get another judgment after foreclosure. If the house went into foreclosure and was auctioned, the mortgage company did not get anything from that judgment — so why would they waste time spending more money to get another one?
They will not waste their time and money.