What About a Deficiency Claim?

What About a Deficiency Claim?

I have written on how bankruptcy can stop and stall a foreclosure so that a person can keep their home in the face of losing it. However, sometimes a debtor does not know some of their rights before the foreclosure and then lose their home.

Idaho does not give the right of redemption after the sale of property in a foreclosure. A person can cure default within 115 days of the Notice of Default recording date before the foreclosure proceedings but this requires all past-due amounts to be paid with the attendant costs.

So what is one to do after a foreclosure or a short sale and the creditor is now coming after the debtor for a Deficiency Judgment, which is allowed in Idaho? A Deficiency Judgment is the amount of money between the loan amount and the received funds from a short sale or foreclosure. An action must be filed within 90 days after the foreclosure or short sale. Contractually, the debtor is liable for the full amount remaining on the loan. Additionally, fees and legal costs can be included in this Deficiency Judgment. (More information is available in Idaho Code, Title 45, Chapter 15.) Even if mistakes occurred during the foreclosure, it is virtually impossible to try and undo a foreclosure or prove some lesser amount of deficiency.

Fighting occurs over this deficiency (amount where the creditor is losing money to a debtor) and the debtor who feels it is unfair to have to pay more than the value of the home. In the end, the argument comes down to contract law which requires the repayment of the debt (regardless of the fairness of the situation, which can be convincingly argued both directions).

For a family or person who already lost the home in a foreclosure who could not pay (usually it is even obvious to the creditor), this adds insult to injury to seek the remaining amount. Either way, in Idaho this Deficiency Judgment can be obtained.

Many people cannot afford this judgment, especially if enforced by garnishment. Many times the creditor wants the bill paid within 90 days and may even be willing to work out a payment plan for 12 months. This is just not a possibility for most individuals who lost their home for some very valid reasons.

Hence, many, many individuals who find themselves with a Deficiency Judgment against them file for bankruptcy. Really, there are very few or no other options besides bankruptcy left because the other alternatives would have already been sought if the debtor could have afforded it.

We hear many complaints that bankruptcy will injure the debtor’s credit rating. Sure, this is the case, but no more than a judgment lingering for years over you will. A short sale is just as bad, if not worse, than bankruptcy. A credit contract has a 7 year statute of limitations and must be reported for those years. Either way, the bankruptcy or short sale will show on your credit for 7 years.

Compounding the problem is the additional damage a short sale does to credit. You have a short sale now on your credit for years to come. Then the creditor seeks a deficiency judgment and obtains it. Now you have a short sale and a judgment showing on your credit. Then the individual cannot pay the deficiency judgment, usually in the form of a garnishment, and has to file bankruptcy. Now you have a short sale, a judgment, and a bankruptcy on your credit. Who is laughing now?

The proper method of business would have been a bankruptcy at the beginning before foreclosure, either Chapter 7 where you lose the home but only the bankruptcy shows on your credit, or a Chapter 13 where you keep your home and the credit report shows you as current but with a bankruptcy.

Beware of any individual who indicates that a short sale is better for credit than a bankruptcy. Usually short sale people will tell this tale so you will agree to sell the home for less than the loan value and fail to tell you about potential deficiency judgments.

Even if you do not take the bankruptcy route, that deficiency judgment will linger until paid off continuing to ding the credit. Too many cannot afford the deficiency judgment and get behind on other bills and the pain continues to string out. Most eventually file for the bankruptcy anyway, why not just do it at the beginning and have one black eye rather than three?

For more information from an experienced lawyer, contact us regarding your situation. Bankruptcy probably is your best option.