What to do when you are sued for a deficiency judgment

West's Encyclopedia of American Law, edition 2 defines a deficiency judgment as "An assessment of personal liability against a mortgagor, a person who pledges title to property to secure a debt, for the unpaid balance of the mortgage debt when the proceeds of a foreclosure sale are insufficient to satisfy the debt."  

Today, with more people losing their homes to foreclosure and real estate markets being battered, more people are facing the potential of deficiency judgments than ever.  More homeowner's are faced with the challenging question "what to do when you are sued for a deficiency judgment". Here are some steps that can help.

Contact a legal expert

The first thing that should be done is for the homeowner to contact an attorney who specializes in real estate law. Deficiency judgments can damage credit standing even further than a foreclosure already has. In some states, lenders are not allowed to sue a homeowner for a deficiency.  Other states have very specific requirements that define whether or not a homeowner may be sued.

Circumstances affecting deficiency judgments

Many states have clauses in the law that prohibit a lender from filing for a deficiency judgment if a home was sold at less than market value even if the lender suffered a loss.  One example of this is Texas - if the home is sold at auction for less than market value, the lender must credit the difference between
market value and sale price against any amount owed by the homeowner. Texas also requires that any personal mortgage insurance that the lender may be entitled to reduces the amount sued for using a deficiency judgment.

Time considerations in deficiency judgments

There are states that provide for specific periods of time that a lender may sue a homeowner for a deficiency judgment. An example of this would be Arkansas where the lender may only sue for up to twelve (12) months after the foreclosure sale.  Arkansas, like Texas also requires that the fair market value of the home be considered when filing a deficiency judgment.

Some states prohibit deficiency judgments

Several states do not allow a lender to sue a homeowner for a deficiency judgment without very specific notifications being made. Still others force the lender to allow the homeowner to exercise their right of redemption.  Rights of redemption allow the homeowner to potentially claim their home back. For example, in Massachusetts, a lender who sues a homeowner for a deficiency judgment then sets off a chain of events that may allow the homeowner to reclaim their property, even if it was previously sold at an auction.

The first thing you should understand when trying to decide what to do when you are sued for a deficiency judgment is that you need legal representation.  Loan servicing agents are not always current on the individual laws in each state. There may be options available to you if you are sued for a deficiency judgment that you may not know unless you contact a qualified attorney.

Sources: Foreclosure.com and Foreclosurelaw.org