10 Jun Foreclosure Sale May Not End Financial Liability
Over the past year or so, I have noticed a disturbing trend in post-foreclosure problems reported by clients and potential clients in my Atlanta area bankruptcy practice.
Problem one relates to deficiency balances post-foreclosure. This situation arises when a property is foreclosed but the sale generates less than the value of the property. In such a situation, the lender has a claim (at least in theory) for the deficiency. In Georgia, this type of deficiency was rarely pursued because Georgia law requires the lender to file an action in the appropriate Georgia Superior Court to "confirm" the deficiency before a judge, whereby the lender produces evidence that the foreclosure sale was reasonable and that the property was sold for fair market value.
In the past, these "foreclosure confirmation" actions were rare, but with the drop in property values, they are making a comeback.
Problem two relates to second or third mortgages. In Georgia, a foreclosure sale by a mortgage lender wipes out junior or subordinate mortgage obligations. However, the borrower’s personal liability under the promissory note associated with that junior mortgage is not wiped out. When home values were steady or on the rise, it was not uncommon to see junior lenders buy the property at the foreclosure sale conducted by the first lender, and thereafter sell the property at a profit.
Now, with property values on the decline, second mortgage lenders no longer do this; instead, they sue on the note. I have seen numerous instances where a junior mortgage holder has sued the borrower personally on the note, resulting in judgments of many thousands of dollars.
The point here is that in years past a Georgia homeowner facing foreclosure could basically walk away from his home and generally not face any serious consequences. No more.
Jonathan Ginsberg, Esq.
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