Defaulting on mortgage payments has many consequences for a borrower. In all states, it could mean the lender has the right to foreclose on the home. If that happens, the borrower will lose the home and it will be put up for a short sale to cover the cost of the mortgage. In some states, however, lenders can take further action even once the borrower is out of the home. These are known as recourse states, and that recourse can have significant repercussions for the borrower.
So, is Florida a recourse or non-recourse state? To understand that, you need to understand what the two terms mean, and the differences between them.
What Is a Recourse Mortgage?
A recourse mortgage is a loan that allows the lender to take additional action after they have foreclosed on a home. This action allows them to recover the amount still owed on the mortgage.
During the foreclosure process, the home is put up for a short sale. Typically, these sales do not generate enough proceeds to fully cover the amount the original borrower still owes on the mortgage. When this happens, the lender can then file a lawsuit against the original homeowner for the deficiency.
As with most lawsuits, those involving deficiencies are heard before a judge. If the judge finds in favor of the lender, they will issue a deficiency judgment. This judgment allows the lender to collect the amount of the deficiency through a number of ways. They may garnish a borrower’s paycheck, or levy the borrower’s bank accounts.
What Is a Non-Recourse Mortgage?
A non-recourse mortgage is more advantageous for the borrower, and poses more risk to the lender. When a borrower defaults on this type of mortgage, the lender is very limited in how they can recover the debt. Foreclosures are still possible on non-recourse mortgages, but that’s about the only action lenders can take. Even if the proceeds from a short sale only cover a fraction of the amount still owed on the mortgage, the lender cannot file a lawsuit, nor can they obtain a deficiency judgment against the borrower.
Is Florida a Recourse or Non-Recourse State?
Unfortunately, like most states, Florida is a recourse state. It is fairly easy for a mortgage lender to file a lawsuit against you after foreclosure to obtain a deficiency judgment for the remainder of the loan. This means it’s very simple for a lender to start garnishing your wages or levying your bank accounts.
To add insult to injury, the lender has up to five years after the conclusion of the short sale to even file for a deficiency judgment. For borrowers, the consequences of this are great. It means that you could still pay the penalty for a foreclosure for as long as 10 years, or maybe even more, after the short sale is finalized.
Deficiency judgments often put borrowers in great financial hardship. These are individuals who couldn’t afford to pay their mortgage and at a time when they have lost their home, the lender is asking for even more money. For many, the only alternative is bankruptcy.
If you can file for bankruptcy, the deficiency judgment, and all actions associated with it are discharged. It’s understandable that for most people, bankruptcy is a last resort. In cases such as deficiency judgments, however, they can provide great relief to borrowers.
Another option is to contest the foreclosure in the initial lawsuit. Too many borrowers do nothing when they receive a foreclosure notice. In these cases, they don’t go to court and the lender is often awarded a default judgment based solely on the grounds that the borrower was not present at the hearing.
However, if you go to the hearing and contest the foreclosure, it could force the lender to the negotiating table. There, you can form an agreement that bars them from trying to recover the deficiency. A foreclosure defense attorney can help establish valid arguments and defenses to contest the foreclosure and maybe even help you keep your home and avoid a deficiency judgment.
All of that being said, just because lenders can sue for a deficiency in Florida doesn’t mean that they will. Banks and other lenders understand that lawsuits are expensive and they often don’t want to deal with the hassle. If they also think there is little chance of recovering the debt from you, such as if you are currently unemployed, there is little chance they will file for a deficiency.
How to Avoid Deficiency Judgments
The best way to avoid a deficiency judgment is to avoid foreclosure altogether. Some borrowers may have options available to them such as a loan modification, or a deed-in-lieu of foreclosure. With these two alternatives, as well as short sales, it’s important to include a clause in the agreement stating that the lender cannot pursue a deficiency judgment. This bars them from filing a lawsuit against you.
When taking this route, it’s important to understand that the IRS considers forgiven debt as taxable income. If a lender forgives your debt by waiving their right to file for a deficiency, you may have to pay taxes on that full amount of forgiven debt come tax time.
Sometimes, borrowers simply can’t avoid foreclosure. To make matters worse, their lender successfully sues them for a deficiency. It is still possible to negotiate with the lender for a smaller amount or to pay the deficiency in installments. This is often a much better option than having wages garnished or bank accounts levied.
Facing Foreclosure? Call Our Florida Foreclosure Defense Attorneys
It’s a very scary time when homeowners are facing foreclosure. If you’re behind on mortgage payments or your lender has already started the foreclosure process, you need to speak to our Fort Lauderdale foreclosure defense attorneys. At Loan Lawyers, we are passionate about standing up for the rights of borrowers and negotiating with the other side to give you the best chance of a positive outcome. You don’t have to go through the foreclosure process alone. Call us today at (954) 523-HELP (4357) to schedule your free consultation.
Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 2,000 homes from foreclosure, eliminated more than $100,000,000 in mortgage principal and consumer debt, and have recovered over $10,000,000 on behalf of our clients due to bank, loan servicer, and debt collector violations. Contact us for a free consultation to see how we may be able to help you.