The Collection Advisor February 2012 issue brings us some creepy news from debt collectors on Mortgage Deficiency Collections.
“It could be said that some consumers might be in a better position financially post-foreclosure, as they no longer need to worry about making large mortgage payments. Any analysis regarding these deficiencies should begin with a discussion of whether the loan is recourse or non-recourse. A recourse loan is, ‘a loan that allows the lender, if the borrower defaults, not only to attach the collateral but also to seek a judgment against the borrower’s (or guarantor’s) personal assets.’ Blacks Law Dictionary 955-956 (8th ed., West 2004). The majority of states are so-called ‘recourse states’ and permit lenders to pursue a mortgagor personally for a deficiency after sale.”
“An interesting situation potentially arises where a creditor obtains a deficiency judgment against a consumer and places a judicial lien on another piece of real property at which the consumer resides. If the consumer subsequently files for bankruptcy and asserts his or her homestead exemption as to the residence, there is some question as to whether the bankruptcy code allows the consumer to avoid the judicial lien resulting from the deficiency judgment. One bankruptcy court has rules that the language of the bankruptcy code is ambiguous as to whether the judicial lien can be avoided in such a situation, and posited that a public policy concern called the ‘Flow of Capital Purpose’ should prevent avoidance of liens resulting from a deficiency judgment. See In re Crisuolo, 386 B.R. 389 (Banr. D. Conn. 2008).”
The bottom line is that if you own property in a recourse state such as Florida which allows creditors to obtain and pursue deficiency judgments then don’t delay on obtaining a full release of liability through a short sale at this time. Mortgage lenders will allow the debt to be settled with a zero balance now, but if you wait then all you have to look forward to are mortgage deficiency collections.