Suits Under Mortgage Note Rather Than Foreclosure Of Mortgage

More than half of my bankruptcy calls are from people facing foreclosure on their investment property and who fear a deficiency judgment. One person asked me today if it makes a difference whether a bank sues for foreclosure or whether the bank sues on the promissory note underlying the mortgage security. For general information, most lenders sue to foreclose mortgages in default because foreclosure gets the lender the title to the property. After recovering the property, the lender may choose to pursue a judgment for the deficiency between the amount owed and the property value. To get a deficiency judgment the lender has to prove that the property value on sale date was less than the mortgage debt balance.

A lender can also sue the borrower for a default under the promissory note without pursuing a foreclosure and recovery of the property. If payments are past-due most promissory mortgage notes allow the lender to accelerate the note and demand full payment of the note. If the borrower does not pay off the note immediately the lender can proceed for to get a judgment against the borrower for the full amount of the note plus interest and usually attorneys fees. In a declining real estate market some lender may elect not to take back the real estate and sue directly for a judgment against the borrower individually, especially if the lender believes the individual debtor is vulnerable to collection. By suing on the note the lender does not have to prove the value of the property in order to get a judgment against the borrower.

Bankruptcy can discharge individual liability to the lender regardless of whether the lender sues for a deficiency judgment or sues directly for default of the promissory note.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida