D is for DeficiencyThe mysterious deficiency balance. There is a lot of misinformation, from various sources, regarding a deficiency on your home mortgage.

The deficiency is the amount of money that you may still owe the lender or mortgage company when a property short sells or is foreclosed.

I often visit blogs of other real estate professionals to get their opinions and angles on the same topics I deal with as a bankruptcy and consumer attorney.

A realtor and blogger was discussing a new Florida bill called the Florida Fair Foreclosure Act. If passed, it would reduce the amount of time a lender can pursue a deficiency judgment. As well as other changes that are not so homeowner friendly.

His comments were as follows:

It reduces the time a bank can go after a foreclosed homeowner for a deficiency judgment from five to two years. This change will be welcomed by bankruptcy lawyers whose clients are trying to go on with their life and repair their credit scores, only to be hit again with a deficiency judgment five years later. (my emphasis in italics)

The misconception above needs to be cleared up. If someone files bankruptcy, and receives a discharge, there is no deficiency for a lender to collect.  It has been wiped away, permanently. Nothing owed, forever.

I hope that is clear. Since it seems that various real estate professionals cannot get this straight.

I know this person. I don’t think it was deliberate. I think it was just poor wording. I think he knows the correct answer.

But when this information goes on the internet, unchecked, people think it is correct. And I know many people rely on this person’s information as accurate.

This is just one website. Imagine all of the misinformation out there?

Another considering a deficiency is the Mortgage Forgiveness Act.

This law only covers if the lender issues a 1099 for forgiven debt. It does not affect the lender’s ability to pursue the deficiency before issuing a 1099. Just because the home is your primary residence does not mean you are fully protected from the lender collecting. Again, it only involves a possible 1099 being issued later.

There should be some concern though:

  1. As of right now, the law ends at the end of 2012. Will it be extended? You guess is as good as mine.
  2. Do you have a second mortgage, and did you use those funds for anything other than the house? Did you cash out and start a business, buy a car? If so, the forgiveness of the 1099 may not apply.

I hope this information shows the importance of getting solid information, from the right professional, regarding how to clear your debts. Please understand that some professionals can only give advice on certain aspects of your debt, and sometimes they get that wrong.

A qualified attorney is your best option for advice on all aspects of your financial health.

Creative Commons License photo credit: M.B.X.