Mortgages can be divided into two classes: recourse and non-recourse. A lender which makes a recourse loan has the right to seek a deficiency judgment for any short fall it experiences as a result of the borrower's default. On the other hand, the only remedy available to a lender when a borrower defaults on a non-recourse loan is foreclosure; the lender cannot seek a deficiency judgment.
To obtain a deficiency judgment a lender must file a lawsuit against the borrower of the loan after foreclosure. If the lender wins the deficiency judgment lawsuit, it has the right to pursue collection efforts against the borrower to collect the amount it lost as a result of the borrower's default.
Non-Judicial Foreclosure vs. Judicial Foreclosure
Generally, in states where non judicial foreclosures are authorized, most loans are considered non-recourse. However, in some states, such as Georgia and Texas, even if a lender opts to use the non-judicial foreclosure remedy, it may still seek a deficiency judgment.
In judicial foreclosure states, lenders may seek deficiency judgments on loans after foreclosure as a matter of right. However, some states have laws which prohibit lenders from seeking deficiency judgments under specific circumstances. Nevertheless, even when lenders have rht legal right to seek a deficiency judgment, most usually only do so where the borrower has other assets or has not demonstrated a hardship.
Cancellation of Debt Income
Debt canceled as a result of the foreclosure of a non-recourse loan is considered cancellation of debt income and may be subject to income taxes depending upon the character of the foreclosed property. Pursuant to the Mortgage Relief Debt Forgiveness Act of 2007, canceled debt on qualifying real estate may be excluded from income. The Mortgage Relief Debt Forgiveness Act applies only to principal residences where the loan proceeds were used to buy, build, or improve the property. Additionally, foreclosure of a home equity loan results in a taxable event for the homeowner unless the proceeds of the loan were used to buy, build, or improve the property.
Getting Legal Help
Because a deficiency judgment may leave you in a worse financial position than the foreclosure itself, you should speak with a qualified foreclosure attorney to determine your rights and possible liability. You may also consider speaking to a bankruptcy attorney who may be able to assist you in formulating a strategy to protect yourself from a deficiency judgment.
