Bankruptcy: Remedy for Foreclosure Deficiency Judgment

One of the most feared results of a foreclosure is having a court direct a deficiency judgment at the person or persons who lost the property to foreclosure.  A deficiency judgment is a legal method of identifying an amount still owed by the previous property owner to the mortgage or Loan Company after the foreclosed property was liquidated.  The amount listed in a deficiency judgment is difference between what was owed the mortgage company minus the amount the property was sold for plus any fees and cost incurred during the foreclosure by the mortgage company.  The threat of the deficiency judgment is often against a person’s home unless the home was foreclosed and the source of the judgment.

One of the most sought remedies against a deficiency judgment is bankruptcy.  Given the person who lost property to a foreclosure did not file for bankruptcy in an effort to retain the lost property, it must be assumed that the lost property was not the person’s main residence, but another property like a rental property or summer home or condo or the like.

Filing for bankruptcy to obtain relief from a deficiency judgment is not a sure thing, not a guarantee.  The very first consideration when considering bankruptcy is the hiring of an experienced, knowledgeable bankruptcy attorney familiar with the courts and jurisdiction where the bankruptcy will be filed.  There are a sufficient number of points to consider in filing a bankruptcy that planning with one’s lawyer is the best first step.  The second biggest consideration when one is thinking of filing is how does one protect one’s home during bankruptcy proceedings.  Federal Bankruptcy Law (FBL) itself only offers between 11 and 22 thousand dollars in worth protection as an exemption.  The real hero in bankruptcy protection of a person’s home, especially if a family is involved is the specific state laws that supplement the FBL.  FBL states that to claim a state’s exemption protection for a main residence, the debtor must have lived in the state for three years and four months or forty months.  If a debtor meets the residency requirement, then the benefit of the state’s home exemption applies.  Seven of the sovereign states of the Union have seen fit to fully exempt the debtor’s main residence.  Many states offer from $125,000 to a half million to even a million under certain conditions.  Many other states are not that generous.  Again, check with the state and consult with one’s lawyer.

To finish with the deficiency judgment, Chapter 7, if the debtor meets the “means test” will likely wipe it out.  Chapter 13 will require some payment over three to five years and then wipe out the rest.  With a number of other exemptions by FBL and the state, a debtor’s credit will be trashed, but at least the debtor will come away with a home and the ability to rebuild.  States again have been heroic by also knocking down liens against the debtor’s home when a deficiency judgment applies one.  Most, if not all states do this, so, again, consulting with one’s lawyer is always the first place to start planning.

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