deficiency judgement

mmm · Tar Sands Joined: Jul 05, 2004 Posts: 37

I thought I'd point out something to people who have a large mortgage and might be planning on abandoning their property when peak oil hits...

You might be under the impression that you can simply "walk away" from your property. Sorry. After the foreclosure auction dumps your property for whatever pittance can be salvaged, the bank will turn around and ask for a "deficiency judgement". That means that they will ask for all of the money from the mortgage that was not covered through the sale.

Just hope that whatever crazy politicians are in power at this point don't decide to reinstitute slave labor debtor's prisons.

pepper2000 · Heavy Crude Joined: Oct 15, 2004 Posts: 123

Of course, there are ethical issues to keep in mind there as well. We know there will be economic dislocations in the future. By accumulating debt and abandoning financial commitments, you're really making the problem worse for everyone else.

bobaloo · Heavy Crude Joined: Oct 14, 2004 Posts: 447

legal advice here, you might want to mention that deficiency judgments depend on state law, some states outright prohibit them, others limit them. The last time I looked, for example, California prohibited deficiency judgments, the creditor could only get the value of the property.

Another legal option is the little known Chapter 12 of the Bankruptcy code. It was intended to apply to farmers during periods of deflating land values, but what it allows you to do is write down the value of a debt to the current value of the collateral. In other words, the mortgage is reduced to the current value of the property.

I know people have different opinions about debt / bankruptcy, but my take is that part of every payment you make is for the risk associated with loaning money, it's figured into the "cost of doing business". One of the stupidest things I ever did was to NOT file bankruptcy when I should have (after my business partner stole 100K from me). If I would have gone out the next day and filed, I'd have it all behind me and out of my mind. Instead I spent years paying off the debt and have various problems related to that which may haunt me the rest of my life.

seahorse · Expert Joined: Oct 15, 2004 Posts: 2024 Location: Arkansas

I'm a lawyer, so I will add what I can. It is correct that state law will determine whether a deficiency judgment on a home mortgage can be collected against the debtor (in Arkansas it can). However, even in states where a creditor can proceed with a deficiency judgment against the debtor, bankruptcy will wipe it out. Chapter 7 wipes it out entirely, Chapter 13 is a payout (reducing the interest paid), and Chapter 12 may or may not apply, and is generally limited to farmers.

I wouldn't worry about the creditors. I'm in agreement that their playing loose with lending practices has created this mess, not the debtors, and that when creditors lend money, they undertake the known risk that a debtor may file bankruptcy. Its a planned for cost of business on the part of the creditor. So, no sympathy on my part for them.