I recently wrote about one of the lingering fallouts of the 2008 financial meltdown: foreclosures on credit reports. We see them all the time – often listed among other debts as reasons for our clients’ security clearance denials. What my prior article did not cover, however, is deficiency judgments. Because federal agencies require clearance holders to have made a “good faith” effort to resolve all debts (and reliance on a statute of limitations is usually not viewed as a good faith effort), many clients think that the huge deficiency noted on their credit report post-foreclosure is an insurmountable obstacle. After all, if the client was unable to pay the mortgage note, how can they possibly be expected to pay a huge deficiency?
Fortunately, foreclosure deficiencies sometimes offer a legal defense other than payment.
To start, you should understand that there are generally two options for a lender to foreclose on a home. The availability of these options varies by state, but they are called “judicial foreclosure” and “non-judicial foreclosure.” In the former, the lender literally sues a delinquent borrower and obtains a court order for the foreclosure. Where that happens, the lender typically has the option to pursue a “deficiency judgment,” meaning that the borrower is personally liable for the difference between the amount owed on the home loan and the amount for which the home subsequently sells at a foreclosure auction. I’ve seen cases with deficiency judgments exceeding $100,000.
The latter option occurs when the lender, proceeding under the terms of a trust deed, simply takes the property back without ever going to court (unless a need for formal eviction arises). Where available, lenders often prefer this method because it is faster and cheaper. The trade-off for this expedited process – and the decreased protections it affords borrowers – is that many states prohibit a lender proceeding under non-judicial foreclosure from collecting a deficiency judgment. In other words, the deficiency shows up on your credit report, but the lender cannot come after you for it. Some states take this even further with strict “Single Action” laws that bar lenders from even reporting the deficiency to credit bureaus.
Know the Nuance
Of course, like everything in the law, there are nuances. For example, there are sometimes different rules when it comes to whether a lender can pursue a deficiency judgment after a short sale or a deed in lieu of foreclosure situation. Many of the protections afforded to borrowers in non-judicial foreclosure states apply only to single family residences or properties with less than four units. Some states offer lenders either judicial or non-judicial foreclosure; others give lenders the option. Finally, the rules are often different with respect to second and third mortgages (AKA “junior” liens). Even in states that bar deficiency judgments, junior liens that are wiped out pursuant to a senior lender’s foreclosure can be recovered with deficiency judgments.
Foreclosure law and its applicability to your security clearance case is a highly complicated area. If the foreclosed home was in a judicial foreclosure state, there is a real probability that you are, indeed, personally liable for the deficiency and it would need to be responsibly addressed like any other debt to salvage your clearance. If, however, your property was located in an exclusively non-judicial foreclosure state, you may be able to rely on the state’s anti-deficiency law as a defense to the debt in a security clearance case. It has been done before with successful results, but you should not attempt this without the assistance of a competent attorney.
This article is intended as general information only and should not be construed as legal advice. Consult an attorney regarding your specific situation.
