A deficiency judgment occurs after your home goes into foreclosure by the bank. If the amount the bank sells the home for is not enough to cover what you owe on the home, then you could be liable for the difference.

How can a deficiency judgment hurt you?

If you owe say $150,000 on your home when it is foreclosed on and the bank only gets $90,000 from the sale of the home, you would be liable to pay the $60,000 difference. Obviously you will not have that amount of money or your home would not have been foreclosed on in the first place. By banks coming after you for the difference they are adding “insult to injury”. Losing a home to foreclosure can drastically drop your credit rating; however a deficiency judgment can wreak havoc for many years to come. It makes it very hard to every repair your credit score, so the chances of you ever buying a new home or car in the future are very slim. There are however some ways people are able to begin avoiding a deficiency judgment 

Tips on how to avoid a deficiency judgment

The best way to avoid the potential of a deficiency judgment is to not allow your home to be foreclosed on. If you are struggling and in danger of losing your home to a foreclosure, you should work with the bank and sell your home on a “Short Sale”. A short sale will protect your credit score and will also keep you from getting the deficiency judgment from the bank.

If you do get your home foreclosed on then you may or may not get stuck with a deficiency judgment. Not all banks will give you a deficiency judgment. Simply go into the bank and ask them if they are planning on filing one. Often times you may be surprised when you find out that they do not plan on filing a deficiency judgment.

If you do get a deficiency judgment and cannot afford to pay it then it may be time to contact a lawyer and consider filing for chapter 7 bankruptcy. When you get a deficiency judgment from the bank or mortgage lender then the best way of avoiding it is to file for chapter 7 bankruptcy. Bankruptcy will destroy your credit rating, but at this point you will also have a home foreclosure and a deficiency judgment so you can pretty much assume that your credit rating is very poor anyways. Filing for bankruptcy will give you a fresh start and allow you to begin repairing your credit rating much faster than if you would not have filed for bankruptcy.

Sometimes if you talk to the mortgage lender and explain to them that you will be filing for bankruptcy if they give you a deficiency judgment then the lender may choose not initiate proceedings. Mortgage lenders hate having to pay unnecessary legal fees, so if you will be protecting yourself from having to pay that difference then the mortgage lender may realize that it will not be worth the time for them to proceed with a court filing if you are going to be avoiding a deficiency judgment by filing for bankruptcy. 

The Strategic Default Plan: How to Walk Away from Your Mortgage
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