LEGAL TREATMENT OF FORECLOSURE DEFICIENCY

A foreclosure deficiency is the amount you legally owe to the creditor after the property is foreclosed upon by the creditor. If a car is repossessed, the creditor takes it back then sells it on auction (same as foreclosure). The auction sale produces an amount of sale proceeds that is normally less than the balance owed on the car loan. After deducting the sales proceeds from the balance owed on the car loan, the resultant amount is the repossession deficiency. For example, you fail to pay last month’s payment on your 2014 MB-350. You still owe $45,000 on the car loan. Last night, your car disappeared from your driveway. You report to the police that your car was stolen. The police check their records and inform you that your car was repossessed. The bank sells the car at auction and gets net sales proceeds of $30,000. Right after the car is sold, bank sends you a collection letter for the difference of $15,000 which is the repo deficiency. Are you legally liable for the $15,000 to the bank even if the car is no longer in your possession? Of course you are. By contract, you owe $45,000. When you defaulted, creditor had the right to get the car back and sell it. If the sales proceeds are not enough to pay off the balance of the contract, you are still on the hook for the difference.

In the case of a house, the foreclosure deficiency will arise if there is a deficiency judgment on foreclosure. State law controls this matter. In Florida, all foreclosures are judicial. This means creditor must file a lawsuit to foreclose the house and to conduct an auction sale on foreclosure. Since there is a lawsuit, there must be a trial. At trial, creditor will ask for a deficiency judgment which the court will grant. So, if you have a rental property in Florida that is being foreclosed, you will most certainly owe a foreclosure deficiency. For instance, you owe $200,000 on the first mortgage. The foreclosure sale yields net sale proceeds of $120,000. You will owe a foreclosure deficiency of $80,000 even if you no longer own the house. Creditor will eventually send you a collection letter demanding the immediate payment of $80,000. I know it’s not fair because you don’t have the house anymore but you still owe $80,000! But as you know by now, life is never fair because there is no natural or divine law that requires life to be fair. You can be a perfectly normal college kid minding your own business but having the very bad luck of crossing paths with Elliot Rodgers AKA the “kissless virgin” near Santa Barbara a few days ago.

Rodgers kills you with his handgun as you enter pizza hut to get your lunch. I mean, can anything be more unfair than having your entire future obliterated by a lunatic like Rodgers? You don’t even know the guy. It’s totally random. He vents his anger on you because you’re with a “hot chick.”

In California, 90% of foreclosures are extra-judicial. This means there is no lawsuit so there is no foreclosure deficiency. The 10% that have a judicial foreclosure lawsuit will end up with a foreclosure deficiency.  The problem in California is that there is usually a home equity loan or a 2^nd mortgage on the property. Even in a non-judicial foreclosure in California, you will end up with a foreclosure deficiency for the entire amount of the home equity loan (HELOC) or 2^nd mortgage. For example, you owe Bank of America $500,000 on the first mortgage, and $100,000 to Green Tree for the HELOC. The foreclosure sale by Bank of America yields a net of $400,000. You will not owe Bank of America anything if the house was extra-judicially foreclosed, but certainly you will still owe Green Tree $100,000 on the HELOC even if you no longer have the house.

The foreclosure may have happened in 2009, and it is only now that Green Tree is after you for the $100,000. Consider a Chapter 7 to wipe out the $100,000 if you qualify, or a Chapter 13 and pay a portion of that debt, perhaps even pay Green Tree nothing in a zero percent plan!

“As for God, His way is perfect; the word of the LORD is proven; He is a shield to all who trust in Him.” – Psalm 18:30.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years.  He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California.  He speaks Mandarin and Fujien and looks forward to discussing your case with you personally.  Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave, Mailstop 58, Bldg A-1 Suite 1125, Alhambra, CA 91803.