Deficiency Claims Arising from
Tennessee Mortgage Foreclosures
Sometimes, there is no money to avoid foreclosure. If you have lost your job, faced unexpected medical problems or gone through a divorce, you may not have the money to try to save your house if your mortgage lender starts foreclosure proceedings.
In our Knoxville bankruptcy practice, the attorneys and staff of Clark and Washington recognize that not every client needs a Chapter 13 to stop a foreclosure for the purpose of saving a home.
What happens if you just move and do not contest the foreclosure? In most cases, there will not be any repercussions. If your home is worth approximately what is owed on it, your mortgage lender is not likely to pursue a deficiency claim against you.
However, this is not true in every case, and you need to be aware of your potential risk of a deficiency judgment following a foreclosure.
Under Tennessee law, mortgage lenders have the right to pursue deficiency claims against you. In other words, if your house has decreased in value and the foreclosure sale nets less than what is owed, the lender can come after you for the difference.
Which Loans Produce the Most Risk of a Deficiency Claim?
The real risk is in the case of second or third mortgage lenders. In recent months, attorneys in our Knoxville office have seen a number of instances in which second or third lenders will aggressively pursue homeowners for a deficiency balance post-foreclosure.
Example: our client, “Nelly,” owned a home near Clinton that she had lived in for the past 15 years. The fair market value of this home was around $195,000. In 2003, following her divorce, Nelly refinanced her mortgage and took out an interest only loan. At the same time, she took out a home equity line of credit (HELOC) and she purchased a new whole house air conditioning system, financing that purchase with what amounted to a 3rd mortgage.
Because of the decline in real estate values, Nelly’s house is worth about $165,000 now. She fell behind on her payments and the first lender started foreclosure proceedings. Nelly met with one of the lawyers in our office and we decided that Chapter 13 did not make sense because Nelly did not have sufficient cash flow to fund a Chapter 13. We discussed Chapter 7, but Nelly decided against that.
Nelly did not contest the foreclosure and heard nothing for six months. Then, in February, 2008, Nelly received a letter from the HELOC lender and one from the company that financed the air conditioning system. Both of these lenders were demanding payment and threatening to sue her on the promissory note she had signed.
Nelly came back to meet with her Clark and Washington lawyer and we calculated that the deficiency balance she owned totaled over $50,000. Nelly used Chapter 7 to avoid the stress of a deficiency claim lawsuit and associated collection activities.
In addition to second and third lenders, we frequently see deficiency claims from private lenders - individuals who invest in real estate by making private mortgage loans. If you have one of these loans, do not expect this type of lender to walk away from a loss that arises following a foreclosure.