A foreclosure may affect many of an individual’s assets, not just their home. Foreclosure is a legal process through which a lender takes possession of a home of a borrower because that borrower has defaulted on the payment of their mortgage loan that was used to purchase their property.
In states that follow one of the foreclosure types called judicial process, a foreclosure begins when a lender files a lawsuit to collect on the outstanding debt that is owed by the borrower. However, there are 22 states that allow a bank or a lender to initiate a foreclosure without going through court proceedings.
In certain states, both of these processes are available. Once a lender has taken possession of a home and the borrower has vacated the property, the lender will sell the property.
In some cases, the property will be sold at an auction, and in other cases, it will be sold through the conventional real estate market. The proceeds of the sale of the property are then applied to pay off the mortgage loan principal and any interest that accrued.
In 38 states, the owner of the property remains liable for any deficiency. A deficiency is any amount of a loan that is not paid by the proceeds from the sale of the property.
In these states, a lender can file a lawsuit against a borrower to recover the amount of the loan that was left unpaid by the sale of the property. A lender may be able to obtain a deficiency judgment, which would allow them to pursue a borrower’s assets they own other than the property that was used to secure the loan in order to satisfy the loan deficiency.
Other examples of borrowers’ assets that may be affected by a foreclosure include, but may not be limited to:
- Other real property;
- Personal property, such as a motor vehicle;
- Wages, as their wages may be garnished;
- Bank accounts.
A foreclosure will show up on the borrower’s credit report within a month or two after the borrower fails to make a mortgage payment. It will remain there for seven years following the date of their first missed payment.
After seven years, the foreclosure should be removed from their credit report. In some cases, an individual may face foreclosure on business assets if they are not protected, such as under a limited liability company.
Are There Other Options Besides Foreclosure?
Yes, there may be foreclosure alternatives for homeowners to avoid foreclosure. If a borrower cannot make their mortgage payments, they may be able to sell the property through a short sale.
With a short sale, the lender allows the homeowner to sell their home for a price that is lower than the principal balance of the mortgage. Even with a short sale, the lender may still be able to hold the borrower liable for any deficiency if the law of the state in which the property is located allows.
If the borrower can avoid a foreclosure, however, it may help their credit rating. If a borrower has a second mortgage, they may also be liable to the lender of that second mortgage for any deficiency.
This would include all or part of the balance of the second mortgage that remained unpaid after the sale. A lender has to approve a short sale, and may take a fairly long time to assess a short sale request.
In addition, there may be income tax consequences for a short sale. Because of these issues, a borrower may want to consult with a tax professional before deciding to go through with a short sale.
What if the Property Does Not Sell at Foreclosure?
The property may not sell at the foreclosure auction, or the lender hasn’t been able to sell it otherwise. In that case, they may take ownership of the property and sell it through their own process for selling a foreclosed property. A lender may add the property to their portfolio of foreclosed properties, also referred to as real-estate-owned (REO) properties.
These properties may be appealing to real estate investors and other parties because the lender may sell them at a price that is below their true market value. This may negatively affect the lender and the borrower as well because it may leave a deficiency for which the borrower will be liable.
How Can a Lender Get To My Other Assets?
There are three main ways in which a lender may be able to obtain the assets of a borrower who owes a deficiency on their mortgage loan after a foreclosure in states where it is permitted, including:
A lender can obtain access to assets other than a borrower’s real property through a judgment lien. A lien is a court order that provides a lender with a specific claim against the property of a debtor.
Following a foreclosure, the lender can take that deficiency judgment and use it to have the court place liens on other real property and personal property of the borrower. Liens provide lenders with ownership interests in properties that are subject to liens.
This may include many different types of assets, including, but not limited to:
- Homes;
- Undeveloped land;
- Motor vehicles and boats;
- Business assets;
- Certain trusts;
- Valuable jewelry;
- Art;
- Almost anything else of value that is worth the effort of the lender.
A sheriff may take possession of the personal property of the borrower and sell it to pay the deficiency judgment. If real property was purchased with a mortgage loan, the lender may place a lien on that property and, at the time the borrower sells it, take the portion of the sale proceeds that are needed to satisfy the lien.
A lender that has a deficiency judgment against a former property owner may also petition a court to garnish the borrower’s wages. Wage garnishment amounts, however, are limited.
Under federal law, in general, lenders or other creditors cannot garnish more than either 25% of the debtor’s disposable earnings or the amount of their weekly wage that exceeds thirty times the federal hourly minimum wage rate, whichever amount is less. A creditor with information on a borrower’s bank accounts may place a levy on the funds in those accounts in order to fulfill the judgment of the creditor.
Essentially, a bank levy provides a creditor with access to the funds in the debtor’s bank account in order to satisfy the unpaid balance on a debt, including a mortgage loan deficiency.
Can I Protect My Other Assets?
There are some steps that borrowers can take to protect assets during foreclosure. A deficiency judgment is considered an unsecured debt; therefore, filing for either Chapter 7 or Chapter 13 bankruptcy may be an option for protecting other property from foreclosure effects.
In addition, each state has its own list of exemptions from debt collection. Individuals who are suffering from severe financial hardship may qualify as judgment-proof.
Seek Legal Advice
If you are currently facing the possibility of a foreclosure or are already in the process, it is important to consult with a foreclosure lawyer to help protect your other assets. This is the best way to ensure that mortgage lenders and other creditors do not take advantage of you.
In most states, the law places limits on what items of personal property lenders or creditors can seize or use to satisfy a deficiency judgment. There are also other options you can consider, such as bankruptcy, that may allow you to protect your other assets.
Your attorney can advise you of all of the possible steps and the consequences and possible outcomes of each and how they may affect your property and your credit score.
