Foreclosure has a devastating effect on families and can carry consequences far more dire than just the loss of your home. Not only does a foreclosure cause severe damage to your credit rating, your lender can demand that you pay the difference between your unpaid mortgage balance and the home’s post-foreclosure sale price. Depending on your circumstances, either you or your spouse may be liable for the costs that arise after a foreclosure.
The Deficiency Balance
After foreclosing on a home, the lender attempts to sell the property in an effort to recoup its losses. Foreclosed homes often sell for less than fair market value. If the final sale price is less than your mortgage balance, the lender may demand that you pay the deficiency. If you cannot or will not pay voluntarily, the lender may take legal action against you or your spouse in order to recover the debt.
Some states, such as California, are “non-recourse” states. Non-recourse states do not allow lenders to pursue deficiency balances after foreclosing on a home. Thus, if you live in a non-recourse state, the lender cannot hold you or your spouse responsible for any losses it incurs after foreclosing on your home.
Mortgage Liability
The individual who originally applied for and received the mortgage is the one legally responsible for any post-foreclosure deficiency. If the mortgage is in your name only, your spouse generally isn’t responsible for the deficiency. If the lender files a lawsuit, the lawsuit will name you as a defendant – not your spouse. If you and your spouse applied for a joint mortgage, however, both of you are equally responsible for any deficiency that remains after the foreclosure sale.
Community Property States
Liability – or lack thereof – isn’t the same in every state. If your property is located in a community property state, the lender may hold your spouse liable for payment – even if her name isn’t on the mortgage loan. In community property states, all assets you and your spouse accrue during your marriage belong equally to both of you. Unfortunately, the same is often true of debt. This permits your lender to pursue your spouse for payment regardless of whether or not she applied for and received the original mortgage. If you owned the home prior to your marriage, however, your spouse is safe. Assets and debts you incurred prior to your marriage are not subject to a community property state’s equitable distribution laws.
Deficiency Judgments
Regardless of whether the lender holds you or your spouse responsible for the remaining mortgage balance after a foreclosure, both of you will suffer the consequences. Any voluntary payment you submit to the lender is deducted from your household budget.
If the lender sues you and wins, it can seize assets without your consent. State laws vary, but judgment holders can generally freeze your bank accounts and garnish your wages. Like a voluntary payment, this loss of income impacts your entire household. Your spouse suffers the financial consequences the same way that you do – even if the debt was never her legal responsibility.
It’s no secret that a foreclosure can pulverize your finances and leave you feeling vulnerable long after you lose your home. Your state’s laws ultimately determine who is and is not legally liable for any post-foreclosure deficiency that may arise. While there is no guarantee that you can protect your spouse from the severe consequences of a deficiency judgment, you can work together to re-establish your financial security, your credit, and your lives.