Over the weekend the Washington Post published a story about former homeowners who find themselves owing money on a home they lost to foreclosure years earlier: Lenders seek court actions against homeowners years after foreclosure. It’s a process called “deficiency judgment,” and it’s not really news to anyone who has paid attention to housing over the last few years. Many similar stories have been published, such as this 2010 CNNMoney story: You lost your house – but you still have to pay.
However, since this is obviously a topic of interest that we haven’t covered here before, I thought it would be worth explaining when you can and can’t find yourself at risk of deficiency judgment in Washington State. Note that this is not legal advice, just my best interpretation of the available information on the subject.
The most authoritative resource I found that details the nuances around deficiency judgment in Washington is this page on short sales from the Washington State Department of Financial Institutions. You can also go straight to the law and read the Revised Code of Washington, specifically RCW 61.24.100.
You could face deficiency judgment in the following scenarios:
- You had loans with two banks but only one foreclosed. The other bank may pursue deficiency judgment.
- Your home was foreclosed in a judicial foreclosure (most foreclosures in Washington are non-judicial via a Trustee Sale).
- You sold your home in a short sale and did not receive a written guarantee from the bank (or both banks if you had two loans) that they were forgiving all outstanding debt.
- You gave your home back to the bank via a deed-in-lieu of foreclosure and did not receive a written guarantee from the bank (or both banks if you had two loans) that they were forgiving all outstanding debt.
- You trashed your home so thoroughly as to reduce its “fair value.”
- You collected rent for your home after the foreclosure sale.
You should not face deficiency judgment in the following scenarios:
- You had just one lender, and they foreclosed in a non-judicial foreclosure (via a Trustee Sale).
- You sold your home in a short sale and received a written guarantee from the bank (or both banks if you had two loans) that they were forgiving all outstanding debt.
- You gave your home back to the bank via a deed-in-lieu of foreclosure and received a written guarantee from the bank (or both banks if you had two loans) that they were forgiving all outstanding debt.
Again, this is not legal advice, and I make no guarantee that the scenarios above are comprehensive, but this should be a guide to at least give you an idea if deficiency judgment is a risk you might be exposed to.
For the most part deficiency judgment is relatively rare in our state, but if you’re worried about it and any of the scenarios in the first list above apply to you, you should contact an attorney (I recommend both Craig Blackmon and Marc Holmes).