Foreclosure Can Haunt Borrowers for Decades: What to Do if It Happens to You
When Guillermo Galindo lost his two-family suburban Boston home to foreclosure in 2009, his 4-year-old daughter had to say goodbye to her beloved dog. It was too difficult to take the pup with them into a rented home.
The Galindo family had struggled financially for months. His employers cut his hours due to the recession. Then rental income declined from a tenant who had lost her job. After an unsuccessful attempt to get the lender to modify the mortgage, the Galindos succumbed to foreclosure.
“I thought it was all over,” he said of his disastrous homeownership experience. He was wrong. Six months later, collection letters started arriving again — not from the lender this time but from the insurer who backed the mortgage on his old property. The insurer claimed he still owed more than $136,000 on the loan he used to buy the house in Revere for $410,000 in 2005, even after the bank seized and sold the property. By this point, Galindo was cobbling together a living teaching first aid to child-care workers. He could barely feed his family, much less pay off a six-figure debt.
Galindo is one of thousands in the U.S. struggling with what is known as a deficiency judgment, where borrowers face demands for the difference between what they owed on a foreclosed home and what the lender got from selling the property. Such claims are legal in many states, although sometimes subject to a statute of limitations. In some cases, debt collectors can hound borrowers for decades after a foreclosure.
“There are certain states where it’s free range, and they can sow whatever havoc they want in terms of collecting,” says Geoffry Walsh, a lawyer with the National Consumer Law Center in Boston. His organization maintains a list of state laws related to foreclosure. The resource can help consumers see if they’re protected by state law from being pursued for a deficiency judgment resulting from a foreclosure. For instance, a time limit may prevent legal action after a certain number of years have elapsed. Walsh says a few states have increased consumer protections since the financial crisis and recession ended in 2009.
Sometimes, debt collectors represent mortgage lenders. In other cases, a collection agency that bought a defaulted loan for pennies on the dollar is looking to get whatever it can from the borrower. Galindo was pursued by the company that insured his lender against a default on the mortgage. The Colombian immigrant, who still struggles with English after 30 years in the U.S., didn’t understand that the insurance he paid for protected the lender — not him.
“It’s like paying insurance for a car, and then you have an accident and you have to pay for the accident,” Galindo says. He knows better now, but it won’t help him resolve the debt.
If this happens to you
If you’ve been through a foreclosure, the threat of a deficiency judgment shouldn’t be ignored. So arm yourself with as much information as possible, just in case the collectors come knocking. Walsh says consumers who’ve lost a home to foreclosure should find out if a judge ruled on the matter, because that has a bearing on whether creditors can get a deficiency judgment from a court, and how much it can be.
“There may have been a final court order that determined the amount of the deficiency,” Walsh says.
Get legal advice
Lawyers like Chip Parker, a partner with Parker & DuFresne in Jacksonville, Florida, have developed some expertise in such cases over the last few years as the number of creditors trying to collect deficiency judgments has risen.
“A year ago, the floodgates really started to open up,” says Parker, who has about 70 clients fighting such claims.
If you’re faced with this problem and can’t afford a lawyer, look for housing advocacy groups that may be able to help or direct you to a lawyer who will assist you at little or no charge. Galindo is now working with lawyers at a legal clinic in his area, but he didn’t even know such an option existed when he first learned of the deficiency judgment against him.
Legal loopholes
Sometimes, defects in the way a lawsuit is filed or the ownership of the debt can be used to defend against it. Some cases, for example, are brought to the wrong court.
“Federal collection law requires that you be sued in the county in which you reside,” Parker says. Some debt collectors have sued debtors in the county where the foreclosed home is, but if the former homeowner has moved to another county, the case is in the wrong venue.
Some debt buyers acquire lists of thousands of names of people who have been through a foreclosure, and the collectors may not be very careful about making sure the debt has been officially handed over to them, Walsh says. If that transfer hasn’t been done properly, the collector may not have the legal right to be dunning you for money or dragging you to court.
But in many cases, things never get that far along. Most banks and insurance companies won’t come after you if it doesn’t appear that you have any assets they could seize.
“The likely primary factor that would determine whether a lender or debt holder pursues a deficiency judgment is the reasonable belief that the consumer has the means to pay the debt,” says Cindy Sebrell, vice president of public affairs for the Association of Credit and Collection Professionals. It’s simply not worth it for them to pursue you if you can’t pay.
“You can’t squeeze blood from a stone,” says Tim Burrell, a real estate broker with Re/Max United in Raleigh, North Carolina, who specializes in helping homeowners avoid foreclosure. He helps them negotiate short sales, where the lender agrees to accept partial repayment of the mortgage if the owner is forced to sell the home for less than the remaining balance.
The nuclear option
“Bankruptcy can be a very effective option for somebody who’s facing a deficiency,” Walsh says. He cautions that not everyone can qualify for a Chapter 7 bankruptcy, which erases most types of consumer debt. But if there’s no other way to avoid a lifetime of payments on a home you no longer own, it can be worth exploring.
Galindo fears that bankruptcy may be his only option. His wife’s home day-care service is keeping the family afloat, but they don’t have enough to pay what the insurer says they owe.
Galindo is proud that he hasn’t accumulated credit card debt or applied for welfare, even when he didn’t know where he would get the next month’s rent. But he needs closure, and declaring bankruptcy may deliver it.
“It’s crazy not to have a future,” he says, “not to be able to think about fixing my credit, not even to open up a business in case I want to do something better.”
So he’s considering whether bankruptcy, unlike foreclosure, will give him that future.
Source: NerdWallet.com
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