Sometimes it’s hard to find relief for your debt even after you have been the victim of the foreclosing process. The sad fact is that even such a drastic resolution doesn’t always tie up all the loose ends. Occasionally, you will end up owning money to your mortgage holder even after the property has been sold off. What happens in the aftermath is, these days, thankfully a lot less drastic than it used to be. Instead of being sent straight to debtor’s prison, you are protected by anti-deficiency laws. When it comes to understanding anti-deficiency laws, a bit of research is in order.
Understanding Anti-Deficiency Laws is Easier Than It May Seem
Occasionally, there is a discrepancy between the balance of the mortgage and the price that a foreclosed property nets at auction. This means that, theoretically at least, you still owe the remaining amount of money to the holder of the mortgage. This imbalance is known as a deficiency. If not properly addressed, it can hang over your head for a very long period of time. However, some jurisdictions do offer you a way forward out of your present trouble.
Some states have passed special anti-deficiency laws. The purpose of these laws is to protect debtors from being sued by the mortgage holder for the rest of the money that may be left over after all of the property covered under the foreclosure process has been concluded.
Anti-Deficiency Laws Are a Life-Saving Measure for Suffering Debtors
States that have adopted anti-deficiency laws offer a measure of life-saving protection to debtors. Under the terms of the average anti-deficiency measure, the holder of the mortgage can only penalize a debtor on the property that is expressly covered within the terms of the mortgage. This means that, even if the market value of the property has plunged below the amount of the mortgage, the debtor can not be forced to cover the shortfall. For example, if the value of the mortgage is $120,000, but the property only sold for $100,000, this means that you are not on the hook for the extra $20,000.
How Do Anti-Deficiency Laws Work?
Under the terms of the foreclosing process, if you fail to make your payments too many times in a row, the holder of your mortgage is entitled to seize the property and sell it to make back the money they are owed. Alternatively, they can hang on to the property and develop it or rent it out in order to see a return on their investment.
As noted above, there will often be a discrepancy – in legal terms, a deficiency – between the fair market value of the house and the actual selling price. If the amount of your mortgage is $500,000 and fair market value of your property is $400,000, there is a built-in deficiency here already. If the property should sell at auction for only $300,000, you will not be liable for the full $500,000. The shortfall between the value of the mortgage and the deficiency created by the sale of the property is covered under modern anti-deficiency laws.
What Can the Mortgage Holder Expect to Recover?
Under modern anti-deficiency laws, the holder of the mortgage will be under certain limitations when it comes to what they are allowed to recover via a foreclosure. If the mortgage you agreed to was intended to cover the purchase of the property you treat as your primary residence, you will not be responsible for any deficiency that arises. The holder of the mortgage is entitled to seize the property, sell it, and pocket the proceeds, but this is the limit of their ability. They cannot proceed to sue you for any shortfall that exists between the auction price and the market value of the property.
Anti-Deficiency Laws Give You the Freedom to Walk Away Clean
The ultimate purpose of anti-deficiency laws is to give you the chance to wipe out your debt and walk away cleanly. You will not be forced to labor for years to come under a series of punishing debt payments or wage garnishments. These laws are also designed to save you from the hassle of having to file for bankruptcy in order to escape immediate payments for any amount that a court declares as a deficiency.
Which Areas Will Not Be Covered Under Anti-Deficiency Laws?
It is important to keep in mind that anti-deficiency laws will not be able to protect you under every single circumstance. For example, these laws are not designed to give you any protection for any extra home equity lines or second mortgages you may have taken out to cover your expenses. You cannot expect any protection for your property if you are not currently using it as your primary place of residence.