Because of falling home prices, borrowers who always paid their mortgage but who have run into unforeseen conditions, like unemployment or a job transfer, can no longer sell their homes for what they owe on their mortgage. So they are forced to sell their home as a Short Sale or Foreclosure and may get caught in a later Deficiency Judgment.
Whether banks can and will pursue judgments depends on many factors, including what state the borrower lives in and whether there’s a second mortgage or other liens on the property.
Some states, such as California, are non-recourse and don’t allow deficiency judgments. But even in these states, if the original loan was refinanced, some or all of it may be subject to deficiency claims.
Deficiency judgments on Short Sales can happen anywahere. In these cases, extinguishing the debt is often a matter of negotiating with the bank. You must ask for a written release of all debt, or you can still be liable for a judgment to be filed against you.
A real estate attorney in Florida sums it up: “People shouldn’t have a false sense of security that a deficiency judgment may not be later sought.” It’s a ticking time bomb.