I Just Got Sued For A Deficiency Judgment, Now What?

August 24, 2010: Lenders are ramping up their efforts to sue former homeowners for deficiency judgments. Lenders are suing homeowners sometimes after foreclosure and sometimes after short sales, on either the first mortgage or the second mortgage or both. If it is the same bank it may combine them into one big lawsuit.

In Nevada, when a homeowner gets sued she has twenty (20) days to respond or otherwise answer the lawsuit. If she doesn’t answer within that time period, the lender can default her. Usually the homeowner or her attorney can talk the lender’s attorney into giving the homeowner additional time (say another 30 more days) to file a responsive pleading to the lawsuit.

One expert estimated that thirty percent of homeowners who get sued for a deficiency judgment walk it down to a bankruptcy attorney and get it virtually discharged on the spot.

Most people will contact an attorney within a few days of getting handed or “served” with the legal documents or “Complaint.” Usually the attorney will try to think of a defense to the lawsuit. When it comes to deficiency judgments, however, there is rarely a defense.

One defense to short sale deficiency judgments is that the homeowner was released from the deficiency judgment or the bank “waived its right” to pursue the homeowner after the short sale. That defense only works for the short sale (not foreclosure) and only if there is evidence the bank forgave the deficiency. Hence, the importance of leaving a “paper trail” while negotiating the short sale!

The other defense is really only a partial defense, and that involves arguing that the fair market value of the house at the time of sale was “more” than what the bank claims, and therefore, the amount the bank is suing for is too much. That is called the “appraisal defense.”

If there is no defense, then the homeowner can always negotiate a settlement lump sum for less than the amount sued upon, or even a promissory note, in exchange for the bank dismissing the suit. If that doesn’t work, an answer should be filed on behalf of the homeowner. Of course, negotiation takes place before, during and after the lawsuit.

Once the answer is filed the lender generally proceeds to get a judgment from the judge on what is called a Motion for Summary Judgment. Once obtained, the judgment is typically sold to a bill collector who garnishes wages or attaches assets, including bank accounts.

If no answer is filed the lender can get a judgment within 60 days or less (sometimes more). If the homeowner answers the suit, the homeowner’s attorney can usually delay the Day of Judgment for at least six months or usually longer (but not always). Those additional several months can be priceless, especially if the homeowner intends to file bankruptcy and simply needs more time to “get her affairs in order” which may mean legally exempting assets into a trust, or whatever. Hiding money shortly before filing bankruptcy, while common, is usually suspect.

If the homeowner needs time, it makes sense to hire an attorney. If the homeowner doesn’t need more time, and/or doesn’t care if they get another judgment against them, then simply ignoring the lawsuit is perfectly acceptable. Just beware of the consequences.

Published by Stout Law Firm

I have passed three bar exams

7 thoughts on “I Just Got Sued For A Deficiency Judgment, Now What?

  1. With BOFA, BEWARE…On their (short sale) approval letter under “WHAT THIS MEANS TO THE SELLER” section. Many contend that BOFA dangles the carrot initially by providing verbiage saying they waive their rights to pursue deficiency judgment and consider debt settled, or Paid in Full. When you go to sit down and sign the final approval letter, they remove the deficiency judgment statement leaving the door open to pursue you for more money later.

    Many contend also that the Seller’s absolutely should consult with a CPA regarding the 1099-C form that BofA should send to the IRS.
    NOTE: 1099-C form

  2. Do you think using informal bankruptcy strategies (http://www.informalbankruptcy.com/) would work to deal with the bill collector.
    I don’t know enough about collectors going after deficiency judgments, but from what I know about the above strategies with respect to collectors trying to collect on credit card debt, it is fairly easy to win against them when filing your own federal suit because they are breaking the law left and right trying to collect on you.

  3. Go to the Clark County Court website and type in “Bank of America” you will see over a thousand cases where the homeower is sued for a deficiency judgment.

  4. Can anyone name one actual case where a bank went after the former owner for the difference? Send me the link to the legal filings or the the news article.

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