One of the biggest questions that I am repeatedly asked as a foreclosure defense attorney is, “What is a deficiency judgment and how does it work?”

Answer is: A deficiency judgment is a filing from the bank against a homeowner or borrower that has gone through foreclosure. The filing is for the amount of money that the bank lost because of the foreclosure. This fee is calculated by taking the unpaid loan balance and subtracting the property value from that amount. The unpaid loan balance includes unpaid interest, any fees the bank advanced like taxes and insurance, attorney fees, and costs such as filing fees associated with the foreclosure.

Many of my clients ask, “How can I avoid a deficiency judgment?” and the answer is this: The only way to avoid a deficiency judgment is if the property were sold at a foreclosure sale. However, because most properties are not sold at the foreclosure sale, the bank ends up stuck with the property.  That is where this gets interesting…

Once the bank ends up with the property, the bank needs to have a hearing before the judge within a set period of time (10 days or a year depending on the Court’s order ordering the sale). At that hearing, called a valuation hearing, the bank needs to provide evidence of the diminished value of the property. Here, the borrower is free to show that the bank improperly valued the property and that there is no deficiency due or a smaller outstanding amount.

Should the court determine that a deficiency is due, the court will enter a judgment against the borrower, which is good for 10 years and can also be renewed by the bank for an additional 10 years. Frequently, banks sell these judgments in bulk to hedge funds or investors that include collection agencies and law firms that specialize in collecting on consumer debt.

Because these impaired loan portfolios are sold on pennies on the dollar, judgment debtors have the ability to negotiate these debts as opposed to having to worry about wages or bank accounts being garnished. Of course, if the creditors get too annoying, one is free to blow them off and seek protection from the bankruptcy courts, where one will likely receive a discharge of the deficiency judgments. In this case, the bank gets nothing.

I know that this can be confusing. At times the banks will “write-off” the deficiency debt by issuing the borrower a 1099 form from the IRS. Banks do this when they think the likelihood of collection is low. The 1099 form takes place of telling the IRS that you may owe tax on the amount that the bank is forgiving because loan forgiveness according to the IRS is sometimes deemed as income for tax purposes.  However, in theory, the bank can still change its mind later and obtain the deficiency judgment and reverse the 1099. Through the end of this year, however, a 1099 issued on a primary residence is not deemed income according to a new law.

So one reason why my FL foreclosure defense firm and I vigorously defend foreclosures is to minimize the risk of a deficiency judgment. We have many tools in our arsenal and deploy them as needed.

Until recently the banks were not even thinking about deficiencies due to the volume of foreclosures but word has it that the banks are now quietly talking to the foreclosure mills to decide how to handle the deficiencies. Of course, with the courts already clogged and with an upcoming round of court layoffs, it will take a long time for the banks to obtain these judgments. But make no doubt about it that the banks will come after a homeowner in foreclosure if they think you have the ability to repay.

There are however, some ways to get around repayment. Not all assets are available to the banks when it comes to the repayment of a judgment. Many assets are exempt such as an IRA or a 401k account.  Sometimes clients want to talk with an attorney early on in the Florida foreclosure process to understand their rights and do some asset protection planning.  At Oppenheim Law, we understand the issues both from 30,000 feet and also at the nano level.  Feel free to chat with me should you have a question.

Roy Oppenheim, From the Trenches.