Do I Have to Pay The Deficiency Bank?

In most cases the person filing bankruptcy is ordered to pay a specific amount on a monthly basis. This amount will be sent to your creditors as payback on the deficient amount for all of your accounts. A mortgage and late payments related to a mortgage is another story.

There are some types of debt that may not be eliminated or reduced by a bankruptcy filing: income taxes, student loans, child support and alimony, and mortgages. That's right: filing for bankruptcy will not free you up from past due mortgage payments. You will still have to make up those delinquent payments.

The benefit of a bankruptcy is not to eliminate past due mortgage payments but to eliminate other consumer debt which may free up your income to help make your mortgage payments or the past due payments may be spread out over as long as a five year period.

What is a deficiency judgment? Deficiency judgments can occur on all sorts of cases where personal property is secured by a note. For example, someone buys a car, finances it and the bank takes it back due to non-payment. There is a $10,000 outstanding car note that the borrower couldn't pay.

After the bank takes back the car they will sell the car for whatever they can get, either to the general public or on a wholesale basis by selling to automobile dealers or automobile auction houses.

If the bank sold the car for $6,000 that's $4,000 less than the outstanding automobile loan. The bank can file a lawsuit to recover the $4,000 deficiency and obtain a judgment. This will appear on the consumer's credit report for seven years, either as a "paid" judgment or "unpaid" judgment.

Banks can also sue homeowners who do not have protection against deficiency judgments. Some mortgages have this protection built into their original mortgage. In most cases this protection is issued to the homestead (primary residence) for mortgages used to purchase real estate. This protection however may disappear when a home owner refinances out of the original "purchase" mortgage, eliminating the deficiency protection.

In this example, the bank could sell the property for $100,000 where the outstanding mortgage balance was $200,000. The bank could then file, when allowed, a deficiency suit against the foreclosed home owner for the difference, in this case, for $100,000. In Nevada, a bank has three months after the sale date in order to file for a deficiency whereas in California there is no limit as to when a bank can seek a deficiency judgment.

If you missed one payment but made it late then none of this will happen to you. If you miss two payments then the foreclosure wheels will really start to spin. But this is not something that will go away.

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