Foreclosures & Deficiency Judgments
by Tina Triano, Attorney

Last month I wrote about The Mortgage Debt Relief Act of 2007 that provides for relief to taxpayers whose primary residences are foreclosed on. I also touched on the insolvency exclusion that has been available to taxpayers who have had property foreclosed on for many years. In addition to potential taxes that you may incur from a property foreclosure, you should also be aware of foreclosure proceedings and potential “Deficiency Judgments.”

Currently, California law allows a lender to foreclose on property through either a nonjudicial foreclosure or a judicial foreclosure. The election is at the discretion of the lender. Other states, such as Florida, do not use the nonjudicial foreclosure process.

With regard to a nonjudicial foreclosure, the lender is not required to file any documents with the court and may proceed with foreclosure under a power of sale. The process begins with the lender recording a notice of default that is sent to all interested parties. There is a waiting period required by law, and then a notice of trustee’s sale is recorded, followed by a trustee’s sale where the property is sold at auction. There are more details involved in this process, but these are the basics. The benefit to a lender selecting a nonjudicial foreclosure is that the property may be foreclosed on in as little as 140 days with minimal legal costs and the borrower is not allowed to redeem the property after the trustee’s sale.

Under a judicial foreclosure, a lender files a lawsuit against the borrower and proceeds with foreclosure through the judicial process. The benefit to a lender selecting judicial foreclosure is that the lender retains the right to obtain a “deficiency judgment” over and above the sale price of the property at foreclosure. For example, if you owe a $500,000 mortgage and the lender forecloses and sells the property for $300,000, the lender is entitled to a $200,000 deficiency judgment plus their attorney’s fees and court costs. The lender can collect from you through other assets that you may own after the foreclosure. Collection on deficiency judgments can result in wage garnishment, seizure of assets and/or the recording of an abstract of judgment that can legally follow you for ten years and may be renewed for another ten years accruing interest the entire time it is not paid. It is very much like an IRS lien that follows you everywhere you go. Aside from settling the debt or filing bankruptcy, there is little you can do to rid yourself of this type of judgment.

An important regarding deficiency judgments is that they do not apply to original owner occupied loans. This means that if you have refinanced your original owner occupied loan or obtained a second mortgage, or if the property was never your primary residence, you have no protection from the lender obtaining a deficiency judgment through judicial foreclosure.

The good news for borrowers in default is that most foreclosure companies and lenders in California are, surprisingly, not using the judicial foreclosure process. The art of judicial foreclosures fell by the wayside during the heyday of escalating real estate values.

If you are finding that you are in trouble on your mortgage payments or you have lost a tenant and can’t make up the payments, you would be wise to consider protecting your assets before any action is filed. Once a judicial foreclosure lawsuit is filed by a lender, it is too late to protect your other assets from collection and seizure through a deficiency judgment. Before any action is filed, you still have time. This is very much like a car accident. You can’t get insurance for the car accident after the accident has occurred.

~Tina Triano Esq. is a California licensed attorney with over 15 years of trust and tax planning experience. Tina is available for group lectures and private consultations.