These days it seems like every other house on the block is headed towards foreclosure in some areas of the country. We’ve seen a few around our neighborhood but overall it’s been relatively light compared to some parts of the country.
When people walk away from a home and the bank forecloses, there is often a gap between what the bank sells the house for and the remaining mortgage balance. In many cases, banks simply sell the house for whatever it can get and then books the loss. Increasingly, banks are starting to go to court to get deficiency judgments against the previous homeowner. Deficiency judgments are court approved balances that the bank has sued the homeowner for. In a lot of cases, this debt can follow you around until it’s repaid. It’s often sold to investors who try to collect using debt collectors. Of course, by the time it reaches that stage there is additional interest piling up.
Not all states allow for deficiency judgments against homeowners. Some states are considered “no recourse” states. This means that once the bank has sold the property at foreclosure, they have to write off the remaining balance owed.
Which states don’t allow deficiency judgments:
- California – Allows only a single legal action (Google it)
- Idaho – Allows only a single legal action (Google it)
- North Carolina
- North Dakota
- Utah – Allows only a single legal action (Google it)
- Washington state
It should also be noted that home equity lines of credit (HELOC’s) and home equity loans are usually exempt from these limitations. If you are facing foreclosure, you may want to seek legal assistance to understand your rights and responsibilities.