Mortgage Deficiency Judgments: How Real Is The Risk?

Many callers and clients are concerned with deficiency judgments from foreclosures on investment properties. Some bankruptcy attorneys I’ve spoken with state their business is increasing largely because of their clients’ concern for deficiency judgments. I have written prior blog posts which explained the process mortgage lenders are required to follow to get a deficiency. I had questioned whether borrowers are exaggerating the risk of deficiency judgments. Today I received a call and email from a prospective client who gave me additional first-hand information about the prevalence of personal judgments against borrowers because of mortgage deficiencies.

The prospective bankruptcy client was facing a mortgage foreclosure on an investment property and was concerned about deficiency judgments. The borrower happened to be a clerk at a local courthouse and worked in the section that handled foreclosure suits. I asked the person to check with the civil clerk who handled mortgage deficiency actions to find out the extent to which lenders are actually pursuing personal money judgments against borrowers for deficiency amounts. The person handling deficiency actions reported that only one or two mortgage lenders have been pursuing any deficiency judgments and that a small percentage of foreclosures also involve deficiency actions. While there is always some risk of deficiency judgments, there is evidence that deficiency judgments are improbable in practice. Many people should wait until after the foreclosure process in complete before filing bankruptcy preemptively to avoid a deficiency action that likely will never occur.

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