©401(K) 2013 - flickr

©401(K) 2013 – flickr

Most homeowners in foreclosure worry greatly about being sued by the bank for a second time even though they have lost their home. This is called a deficiency judgment, and borrowers fear having their bank and retirement account seized, their cars repossessed to satisfy the mortgage, and their wages garnished. All of this sounds very disturbing, but the reality of the situation does not reflect these irrational financial fears.

Many state foreclosure laws do not even allow for this type of lawsuit, which is why every homeowner should look up the relevant laws as soon as they begin missing mortgage payments. But even in states in which deficiency judgments are allowed, the bank could go after a foreclosure victim’s bank account if the house does not sell at the auction for the amount owed on the loan and the bank decided to sued again after the foreclosure for another judgment.

But why would the bank do this to families that have a lost a house?

It is apparent to the mortgage company that the borrowers did not even have the money to pay off the first judgment the bank obtained against them for the foreclosure, so there is little reason for the lender to expect that former homeowners who did not save their homes could pay off another judgment for tens of thousands of dollars. It is simply unreasonable for the bank to expect that it will ever collect on such a debt.

Furthermore, it will cost the bank at least a few thousand dollars to hire local attorneys again to file the lawsuit for the deficiency in the county court system. So the bank will be spending even more money than it spent during the entire legal foreclosure process on court filing fees and legal representation costs when there is no likelihood of the lawsuit defendants being able to pay back the judgment even if the bank wins its case.

And then if the borrowers file bankruptcy and they do not have much in the way of other assets that are not protected, the bank’s deficiency judgment will be discharged and the lender will receive nothing from the debtors. There will just be another loss on another legal judgment that was never collected and is now discharged in bankruptcy. And homeowners do not have anything to lose by filing bankruptcy to protect themselves against creditors — the foreclosure has already scarred their credit, a bankruptcy soon after would not drag it down much further.

So, there is an outside chance the bank could try to sue homeowners again after foreclosure, depending on the state laws. But this rarely happens in real life, as banks know that foreclosed homeowners lose their properties because they do not have the money or resources to make the monthly payment on time. They fully expect that borrowers will not have the money or resources to pay back a deficiency judgment, as well

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