What is a foreclosure deficiency judgment mean in Florida?

By
Services for Real Estate Pros with STAMATAKIS + THALJI + BONANNO

If there is no equity in the property, then it will most likely produce a result where the sale of the property will not be sufficient to pay the entire loan balance in full.  This remaining balance after the sale is what is commonly known as the ‘deficiency.' The lender's are fully within their right to pursue the full amount of any deficiency, as the borrowers signed an unconditional promise to pay the full amount of the loan when the property was purchased. Whether or not the lender is going to decide to collect the deficiency is usually not determined until the last minute. If the lender decides not to collect the deficiency, then they will cancel the debt and report the canceled amount to the IRS as taxable, 1099 income to the borrower. The lender can decide on a combination to partially collect some of the deficiency, and to partially cancel some of the deficiency, but they can not collect 100% and report 100% as canceled debt. For example, if the property is sold for $150,000.00, and the remaining loan balance is $200,000.00, then the deficiency amount would be $50,000.00. A lender could either collect the $50,000.00, or report the $50,000.00 as canceled debt.  The lender could also collect $25,000.00 and report $25,000.00 as canceled debt.  However, the lender can not collect $50,000.00 and report $50,000.00 as canceled debt. In most cases, the lender's will cancel 100% of the debt, as they must receive a more advantageous treatment somewhere else on their own business books by doing so by showing this loss. 

To the extent that the borrower has non-exempt assets to pay the deficiency, the more likely the lender is to try and collect all or a part of the deficiency. In Florida, and probably a lot of other states, exempt assets would include a person's homestead, automobiles, 401 K Plan's, IRA's and other similar retirement accounts.  Also, to the extent the lender has ‘private mortgage insurance' (PMI), the more likely that the debt will collected upon. PMI is extra insurance that lenders require from most borrower's who obtain loans that are more than 80 percent of their new home's value. In other words, borrowers with less than a 20 percent down payment are normally required to pay PMI. The reason PMI is more likely to produce a collection scenario is that the insurance company will have to pay out a claim usually equal to the lender's loss. When an insurance company has to pay an insurance claim due to a possible at fault party, the defaulting borrower, they will step into the shoes of the lender in a legal process known as ‘subrogation.' When the insurance company subrogates in, they will generally bring in their own lawyers, and well, the insurance litigators are a different breed of lawyers than the bankers. 

Please keep in mind that the issues of a deficiency are created as a result of the foreclosure law suit, not due to the fact that a borrower may choose to do a ‘short sale.' This is a common misunderstanding.  If a borrower fails to pay the mortgage, and the property has no equity, then the deficiency will be there even if the lender ‘short sells' the property for the borrower at a foreclosure auction sale. However, the lender's auction sale will generally be a much ‘shorter sale' than even a reduced price on the open real estate market. Even if another third party does decide to bid at the foreclosure sale, the amounts generally bid are, again, much less than even a reduced price on the open real estate market. In theory, the public auction sale is supposed to produce an audience that will create a competitive bidding environment that will drive up the property to its highest value.  However, from experience, this is often not the case. The foreclosure auctions are usually advertised very poorly and ineffectively in minor local news paper publications that generally have very small circulations and are very limited in additional content outside of the legal notices. In addition, public foreclosure auctions are generally cash auctions. Any successful third party bidders will have to put down a deposit the dale of the sale, and will have to pay the entire balance within 48 hours. Furthermore, public foreclosure auctions are generally attended by the same group of investors who are there to get a great deal, not pay top dollar. Also, the sales are usually held on week days during work hours. As a result of these factors, the public foreclosure auctions do not generally produce the type of bidding audience that may produce a higher amount than the open real estate market. In fact, many lenders often buy back the borrower's property at these auction sales for $100.00 because no one else bids on the property. It is the opinion of this writer that until that the governmental units conducting these distress sales must realize the value of the internet and employing a web based advertising and bidding system, or even out source the services providers such as ebay.com. Otherwise, the auction sale results will stay the same as they always have.

Comments (16)

Anonymous
FILO

defiency judgements are rarely pursued in florida...thank god

Jun 17, 2008 02:42 AM
#1
STAMATAKIS + THALJI + BONANNO Bankruptcy, Debt and Foreclosure Defense
STAMATAKIS + THALJI + BONANNO - Tampa, FL
Attorneys at Law

FILO, yes that is true that deficiency judgments are generally not pursued by the lenders.  However, we are starting to see a little more of this in the more recent months. 

Jun 17, 2008 02:54 AM
Anonymous
cindy camp

they are not pursued for how long?

Aug 04, 2008 05:32 AM
#4
STAMATAKIS + THALJI + BONANNO Bankruptcy, Debt and Foreclosure Defense
STAMATAKIS + THALJI + BONANNO - Tampa, FL
Attorneys at Law

It really depends on the lender, but if they decide to cancel the debt 100%, then they will not pursue any further collections on the judgment.  Thanks.

Aug 04, 2008 05:54 AM
Anonymous
cliff s

From what I can gather you are not going to walk away scott free from a foreclosure or short sale any longer if you have an equity loan. A foreclosure or short sale may cover the 1st mortgage lender but not the equity loan lender.

The equity lender will place a defeciency lein or report the loan as income to the IRS which will result in Satan moving into financial affairs. If you short sale the first lender, you will have to sign a new note with the equity lender for an adjusted amount or they won't agree to the short sale.

So if you have a equity loan not taken care of in the foreclosure or short sale you will pay for it. Either as a new laon from the equity lender or in taxes to the IRS.

Either way we who bought property, even if it was our primary residence, if we got an equity loan will have to pay unless we claim bankrutcy.

 

Aug 25, 2008 01:28 AM
#6
Anonymous
aphro

so, even though I own a primary residence in a differen state other than Florida, the first mortgagor will most likely not come after me for a deficiency judgement? I don't have a second mortgage on the property...

Aug 28, 2008 12:42 PM
#7
Anonymous
rls09

if the bank bids the $100 and gets the property at the foreclosure sale, can they still go after a deficiency?

Sep 19, 2008 02:46 AM
#8
STAMATAKIS + THALJI + BONANNO Bankruptcy, Debt and Foreclosure Defense
STAMATAKIS + THALJI + BONANNO - Tampa, FL
Attorneys at Law

Yes, the bank can go after the deficiency balance after it has bought back the property at auction sale for $100.00.  Public foreclosure auctions are generally cash auctions. Any successful third party bidders will have to put down a deposit the day of the sale, and will have to pay the entire balance within 48 hours. Furthermore, public foreclosure auctions are generally attended by the same group of investors who are there to get a great deal, not pay top dollar. Also, the sales are usually held on week days during work hours. As a result of these factors, the public foreclosure auctions do not generally produce the type of bidding audience that may produce a higher amount than the open real estate market. In fact, many lenders often buy back the borrower's property at these auction sales for $100.00 because no one else bids on the property. It is the opinion of this writer that the governmental units conducting these distressed sales must realize the value of the internet and employ a web based advertising and bidding system, or even out source to service providers such as ebay.com. Otherwise, the auction sale results will stay the same as they always have.

You will have to do something to deal with the deficiency amount on paper, unless the lender takes care of the issue when they sell the property again after auction, and report the true amount of the canceled debt, after recoupment, to the IRS.

Sep 19, 2008 07:46 AM
Anonymous
clydesur

I am facing a Deficiency Judgment for a condo in Fl that was foreclosed. I owed $923,000 and with interest after the foreclosure I owed $967,182. They claim the property's fair market value is no more than $925,000 and they want the difference of $42,182. They also sent a 1099a with cancellation of debt $54,140 which i was to pay taxes on. Here is the kicker. My realtor sold the property 1 week after the foreclosure for $1,030,000 - after fees and misc. the bank received $961,270 for the property only $5911 diff from what was owed.

My question, do they have the right or can they win the case for $42,182 deficiency based on fair market value or will the judge use the actually sale?

 

Oct 05, 2008 03:07 AM
#10
STAMATAKIS + THALJI + BONANNO Bankruptcy, Debt and Foreclosure Defense
STAMATAKIS + THALJI + BONANNO - Tampa, FL
Attorneys at Law

Your fact pattern is complicated.  Also, I do not believe I have all the facts needed in order to try and answer your question accurately.  However, I would like to speak with you further to clarify some issues, but the bank may be not be giving you an accurate representation of the results and may have committed errors and violations of the law.  Please feel free to call our offices to discuss further.  Thanks.  Toll: 866-479-6946.

Oct 05, 2008 04:26 AM
Anonymous
Jason

Does the bank need a deficiency judgement to go after your assets?  A Real Estate Instructor told me they can automatically take your assets after the foreclosure sale which I didn't believe.

Feb 13, 2009 04:49 AM
#12
STAMATAKIS + THALJI + BONANNO Bankruptcy, Debt and Foreclosure Defense
STAMATAKIS + THALJI + BONANNO - Tampa, FL
Attorneys at Law

Yes, genbrally, the bank will have to be granted a deficiency judgment before proceeding aginst your other assets in the State of Florida..

Feb 15, 2009 01:10 PM
Maya Thomas, Broker
Tampa, FL
Please see my client recommendations.

I had an attorney close a SS for a seller and they got 100% satisfaction of the mortgage at closing. 

The last 2 SS closings the seller didn't want to invest in an attorney.  Neither bank gave 100% satisfaction and they said they were definitely going to pursue a deficiency judgment.

One of your other blogs said that if the lender wrote off the loss they couldn't pursue the D/J and you explained how they could decide amounts to put in each category.  How much time does the lender have to decide?  Can they just sit around for the next 3 years while they make up their mind?  Or, do they need to make a decision in the first year?  When can my seller relax and throw her fear in the garbage and move on?  How will she know if the lender has decided NOT to pursue the D/J after they have threatened?

I might forget to come back her so please e-mail me through AR or call.  Thanks so much!

Mar 20, 2009 10:05 AM
Anonymous
jordan

I am selling my house by short sale...finally! My lender is giving me a 100% satisfaction so they will not be seeking a deficiency but they are going to go to the PMI and get a percentage of the deficient amount.  I spoke to the PMI company today and they said they will reserve the right to pursue a deficiency against me.  I have no second.  The PMI says that they are negociating a percentage with the lender meaning, my home is selling for 70,000 less than what the forclosure notice of 160,000 is filed for.  That number appears to not be changing no matter how long this process has taken.  The PMI agent told me that it will take months for them to settle the insurance claim with the lender.  Then the lender may send me a 1099c for 'forgiveness income'

I have lived in my house for the past 5 years but only need to have lived here as my primary residence for 2 years prior to the short sale.  There is a form called 982 where you can claim the 'forgiveness income' as part of your nontaxable captial gains on your primary residence.  So even if the lender does not send me the 1099c, I should claim the 'forgiveness income' because by doing so I dont incur any taxes and by not doing so I open myself up to being audited beyond the 3 year mark. 

In the short sale I am not gaurentee to have a deficiency filed only that the PMI company reserves the right to pursue one.  They have 5 years in the state of florida to file.  If they sell it and a collection company starts chasing me, the five years will continue to pass and unless the collection company seeks a judgement, I am still not obligated, remember I claimed it on my taxes.  If I negociate a low settlement amount, then I am responsible and that can last 7 years on my credit. Technally I should not be forgiven the full 70,000 because the lender collected an insurance payout but that is assuming I will pay the deficiency.  Should I never pay the PMI then I did recieve the full 70,000 amount and to be safe I would go ahead and claim the full 70,000 on the form 982.

I have read that the PMI may only pay 50% of the 70,000 leaving me with the possiblity of 35,000 that a collection company may try to pursuade me to pay.  The original foreclose notice was posted 2.5 years ago but I think the 5 years for the PMI company will not begin with that date but from the date of the short sale.  This is a technicality that has me thinking.  Most will tell you that you can buy another house two years after a short sale at reasonable rates.  Florida doesn't protect anything other than home equity so if I can afford to buy another house any assests, car, business, investments can all be sought in a judgement.

What strategy can I employ to not be afraid to buy again before the statue of limitations runs out on the right to pursue a deficiency?

Apr 03, 2009 02:19 PM
#16
Anonymous
Jake

I have read your comments about deficiency judgements. However you haven't mentioned that it is difficult for a creditor in Florida to get a deficiency judgement. A creditor has to prove in a separate filing that there is in fact a defieciency. Also, the creditor can be taken to court if he buys the house the under the appraised value. The other factor is if you have other property you can release the foreclosure property from homestead exemption and file homestead on your other property. You can also file an affadavit of head of household to avoid wage ganishment. Florida has excellent asset protection laws.

You can also protect more assets by placing them in an LLC prefferably a Nevada or delaware foriegn enity.

This must be done well in advance of a deficeincy, however fraudulent conveyance is 4 years in Florida.

However if your two years into your LLC and you can prove that your operating a business and that the time you refinanced with the bank was during the up market and gave you a balloon with no pmi i think you have a good case.

Irrevocable Trust can also protect your assets. Don't let foreclose scare you like this moderator seems to convey. IF you protect yourself properly you will never face a a deficency judgement.

Furthermore, Banks, investors, etc. will first do an asset search to determine if you have any assets worth 

even filing a judgement. If the assets are protected or your void of assets they won't even bother with a deficiency judgement. Good Luck!

 

Apr 19, 2009 12:52 PM
#17
Anonymous
Jennifer

My husband was involved in an on-the-job accident and had to medically reitre early.  We are currently in a lawsuit against the insurance company of the driver that hit my husband.  Due to his loss of work, we are currently behind on our mortgage and are looking to perform a short sale soon.  If our mortgage company pursues a deficiency judgement, is our potential lawsuit settlement safe from the judgement due to a personal injury and loss of employment?

Dec 12, 2010 05:14 AM
#18