If you’ve had a vehicle repossessed or a home foreclosed recently, brace yourself for some more bad news: in the eyes of U.S. government security officials, you may still owe a lender money.
I saw an awful lot of government employees and contractors caught off-guard by this during my decade in law practice, and the issue hasn’t subsided. If anything, the advent of continuous evaluation in recent years has exacerbated the problem by eliminating the built-in lag time applicants had to pay-off these so-called “deficiencies” between periodic reinvestigations.
From a legal standpoint, the issue boils down to this: whatever money lenders can recoup in the subsequent resale (usually at auction) of a repossessed vehicle or foreclosed home is usually less the amount lent to the original owner for purchasing the property. Lenders aren’t in the business of eating that difference, so they frequently go after the original borrower for it.
Their ability to do this is limited by a patchwork of state laws; for example, California prohibits lenders from seeking deficiency judgements following foreclosure on a single-family home that was the borrower’s principal residence. But many states are more permissive, and if the amount of the deficiency is enough to sue over, I’ve seen lenders do it. Alternatively, a smaller deficiency balance (often for newer model repossessed vehicles that have retained reasonable resale value) will be sent to collections and appear on the borrower’s credit report.
Many of the clearance holders I encountered over the years erroneously believed that the credit report entry – to the extent they were even aware of it – reflected only the repossession or foreclosure and not any outstanding amount owed. “They took the car (or house)” was the typical confused response. Unfortunately, it isn’t that simple. And just because you haven’t been sued by or otherwise heard from the lender about the deficiency doesn’t mean you don’t technically still owe it. Whether or not additional money is owed is dependent on state law, not whether the creditor decides it isn’t worth pursuing.
Of course, from a civil law standpoint, a creditor who doesn’t bother pursuing a debt owed risks losing the ability to collect it due to things like statutes of limitations. You may be counting on that outcome based on advice from a friend, an attorney unfamiliar with security clearances, or nowadays, artificial intelligence. But here again, clearance holders are in a tough spot. As far as the federal government is concerned, clearance holders are expected to “resolve” all delinquent debts regardless of whether the creditor is actively pursuing it. The government considers tactics that work for non-clearance holders – like simply letting the statute of limitations run – to be incompatible with its expectations of personal responsibility for those it entrusts with access to classified information.
So, what to do about this mess if you find yourself faced with it? The answer isn’t to bury your head in the sand and hope it goes away, as many people do. Rather, hire competent legal counsel to evaluate your matter and determine the best course of action. Perhaps your lawyer can make a credible case to the government that state law in your jurisdiction indicates no debt is owed. Or, depending on the circumstances, you may have any number of legal defenses available to you: predatory lending practices (including usury), unlicensed lender, violation of the Fair Debt Collection Practices act, etc. – some of which can be used to invalidate the debt in court.
Alternatively, a good lawyer may help negotiate a settlement of the deficiency, sometimes for a fraction of the amount owed in recognition that further pursuit of the debt isn’t worth the lender’s time. This can be sufficient “resolution” for security clearance purposes. Note, however, that negotiating with creditors on your own carries substantial legal risks, including acknowledgement of liability for the full amount owed.
Finally, keep in mind that hiring a good lawyer is even better done before losing property to repossession or foreclosure. Oftentimes, competent legal counsel can help clients negotiate a surrender of the property to the lender – thereby eliminating time, hassle, and expense for the lender – in exchange for a waiver of any deficiency. Avoiding a nightmare scenario before it occurs is the optimal outcome if losing the property is an otherwise foregone conclusion.
This article is intended as general information only and should not be construed as legal advice. Although the information is believed to be accurate as of the publication date, no guarantee or warranty is offered or implied. Laws and government policies are subject to change, and the information provided herein may not provide a complete or current analysis of the topic or other pertinent considerations. Consult an attorney regarding your specific situation.
