How to Avoid Deficiency Judgments from Lenders

Kelly Hope Zinser

Written by  Pro

Bankruptcy Attorney - Irvine, CA

Contributor Level 14

Posted over 5 years ago. 7 helpful votes



Negotiate a Settlement Now

Is your home worth less than what you owe on it? Depending on the home's value, your second lender may be willing to accept a lump sum settlement amount to release you from all personal liability on the loan and to remove the second lien on your home. I have heard of homeowners settling their second liens for as little as 10% of the entire loan amount.


Negotiate a Release of Liability as part of a Short Sale

Have you come to the conclusion that you need to sell your home but you owe more than it is worth? Then you are attempting a short sale. In this case, your Realtor needs to negotiate with the lender. There needs to be language in the lender's short sale approval letter releasing not only the lien but also releasing you from personal liability. In addition, the lender should agree that they will not pursue a deficiency judgment against you as part of the short sale approval letter. How do you accomplish this feat? Put some money into the kitty for the lender so they will walk away. Some lenders may allow you to enter into an unsecured promissory note if you do not have the lump sum payment available.


Declare Chapter 7 Bankruptcy

If you do not have the money to settle with your second lender, or if your lender will not work with you - your next possible solution is bankruptcy. But please be careful about this - many, many people need their mortgage payments to qualify for a Chapter 7 bankruptcy under the means test. What does this mean? You need to speak with a bankruptcy attorney before your home is foreclosed on or sold in a short sale to see what your options are. Once your home is gone - you no longer have mortgage payments to help you out with the means test. And you no longer have the credit to get a mortgage. It's a terrible catch-22 and one that I am finding clients in more and more. This may not be an issue for you but if you make more than your state's median income (under the Bankruptcy Code) - then you need to speak to a qualified bankruptcy lawyer sooner rather than later.


Declare Chapter 13 Bankruptcy and Strip the Lien

Another option for homeowners who want to stay in their homes is to declare Chapter 13 bankruptcy. In a Chapter 13, the U.S. Bankruptcy Court can strip the second lien if the value of the home is less than the first mortgage. This means that upon completion of a Chapter 13 Plan (a 3 to 5 year period) and discharge, the debtors will no longer have a second mortgage on their home. (This works for any mortgage on your primary residence other than a first mortgage.)

Additional Resources

Median Income for Bankruptcy by State

Explanation of the Means Test for Bankruptcy

Chapter 13 and Lien Stripping

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