In fact, some states have simply banned deficiency judgments against borrowers when the foreclosure was done nonjudicially through a power of sale clause in a deed of trust. Borrowers in these states can be
completely safe from being sued after foreclosure. Although the nonjudicial process affords the fewest legal protections during the foreclosure, it may offer the best chance of avoiding being sued again after the auction.
Other states place restrictions on how much a lender can recover from a deficiency by limiting the amount of the judgment. This is done by giving borrowers a credit for the "fair value" of the property. The fair value is determined by figuring out what the property is actually worth, and this will most often be defined by the statute itself. It may not mean the sales price at auction or the market value of the home, so it is important to read to the state law on the issue.
Another restriction that has been placed on banks seeking deficiency judgments is strict time frames in which the judgment can be initiated. If banks were able to wait years before suing the former owners, it may be nearly impossible for the family to get on with its financial life. Instead of having borrowers live with the threat of a lawsuit, states have decided that deficiency judgment suits must be pursued almost immediately after foreclosure, or the opportunity to do so is eliminated.
Lenders may also have procedural restrictions placed on their ability to sue borrowers after foreclosure. In some cases, the bank may have to provide additional notices to the owners informing them of the intent to seek a deficiency judgment. As well, the bank may be required to seek a determination of deficiency in the original lawsuit, rather than bring a lawsuit seeking the judgment after the sheriff sale has been conducted.
Many of these restrictions may come into play at the same time, while banks will run into one after another in other foreclosures. These limitations and additional requirements, along with the likeliness of never being able to collect on the judgment, ensure that the majority of homeowners are safe from being sued for a deficiency. While it is not impossible to be sued by the bank, the legal hurdles to overcome in pursuing this lawsuit make it somewhat rare in the world of foreclosures.
Other states place restrictions on how much a lender can recover from a deficiency by limiting the amount of the judgment. This is done by giving borrowers a credit for the "fair value" of the property. The fair value is determined by figuring out what the property is actually worth, and this will most often be defined by the statute itself. It may not mean the sales price at auction or the market value of the home, so it is important to read to the state law on the issue.
Another restriction that has been placed on banks seeking deficiency judgments is strict time frames in which the judgment can be initiated. If banks were able to wait years before suing the former owners, it may be nearly impossible for the family to get on with its financial life. Instead of having borrowers live with the threat of a lawsuit, states have decided that deficiency judgment suits must be pursued almost immediately after foreclosure, or the opportunity to do so is eliminated.
Lenders may also have procedural restrictions placed on their ability to sue borrowers after foreclosure. In some cases, the bank may have to provide additional notices to the owners informing them of the intent to seek a deficiency judgment. As well, the bank may be required to seek a determination of deficiency in the original lawsuit, rather than bring a lawsuit seeking the judgment after the sheriff sale has been conducted.
Many of these restrictions may come into play at the same time, while banks will run into one after another in other foreclosures. These limitations and additional requirements, along with the likeliness of never being able to collect on the judgment, ensure that the majority of homeowners are safe from being sued for a deficiency. While it is not impossible to be sued by the bank, the legal hurdles to overcome in pursuing this lawsuit make it somewhat rare in the world of foreclosures.
Published by Nick Adama
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