Will the Mortgage Company Garnish My Wages After the Foreclosure?

A foreclosure sale is a lender's way of collecting outstanding mortgage debt. If you fall behind on your mortgage payments, you're at risk of having your home foreclosed. This article will take an in-depth look at what happens after foreclosure and whether the mortgage company can try to collect any remaining debt from you.

What Is a Foreclosure?

Foreclosure is the legal process of a creditor taking your home and selling it after you have defaulted on your mortgage. Your real estate is sold to the highest bidder at a foreclosure sale. State laws usually require these foreclosure auctions to be advertised in newspapers for a period of time before a home can be sold.

If the amount owed on your mortgage loan exceeds the amount your home sells for at a foreclosure sale, you will have a deficiency balance. The financial institution can then choose to sue you to recover this balance. If you reach a short sale agreement with your mortgage company, you won’t necessarily be out of the woods. These agreements usually preserve the mortgage lender's right to sue you to recover the deficiency balance. That's why it’s important to carefully review your options before agreeing to a short sale.

What Is a Deficiency Judgment?

Some states require a mortgage company to go to court and get a judge’s order before pursuing foreclosure. Other states allow mortgage companies to foreclose without going to court. Most states allow both judicial and non-judicial foreclosures. Only Michigan, New Hampshire, Tennessee, West Virginia, and the District of Columbia do not allow judicial foreclosures. All other states either allow or require judicial foreclosures.

The District of Columbia and 30 states allow nonjudicial foreclosures. Where there is a choice, mortgage companies usually choose the nonjudicial foreclosure route. Mortgage companies prefer nonjudicial foreclosure because they're cheaper and quicker. The speed of the process is important for these companies because, from their perspective, time is money.

With judicial foreclosures, the time from default to foreclosure can be as little as a few months and as long as three to four years. Courts move slowly. The legal procedure for a non-judicial foreclosure can involve as little effort as a few advertisements of the foreclosure sale in the legal notices of a local newspaper.

State laws vary when it comes to foreclosure. Some states require a judicial foreclosure to pursue a deficiency balance. Other states allow lenders to file a separate lawsuit after a nonjudicial foreclosure to get a deficiency judgment.

Contesting the Deficiency

If you're subjected to a judicial foreclosure, you'll need to answer the foreclosure complaint. If you don't answer the complaint, you'll lose your right to contest a deficiency. If you do answer the foreclosure complaint, you may be able to negotiate with the mortgage company. Your bargaining position will be based on your ability to potentially save the mortgage company some money. You could agree to the foreclosure in exchange for the mortgage company dropping any claims to a deficiency judgment. If you don't have a good legal argument to save your house, this may be a good tactic to use.

Forgiven Debt

If you reach an agreement for the mortgage company to drop their right to pursue a deficiency judgment, they will send you a Form 1099. On this form, you’ll need to report the amount of the debt that your creditor has forgiven. Forgiven debt is treated as taxable income by the IRS.

There are two ways to avoid having the IRS deem your forgiven debt as income. First, if you were insolvent at the time the debt was discharged, you may not have to pay taxes. If you're like most homeowners, your home is your most valuable asset. If you owe more on your home than your home is worth, you were probably insolvent at the time of your foreclosure. You will need to complete Form 982 to determine your level of insolvency.

If you're not insolvent, you still have another option to avoid being taxed for your forgiven debt. You can file for bankruptcy. Section 108 of the Internal Revenue Code has an exception for debts discharged in bankruptcy.

Nonjudicial Foreclosures and Deficiency Balances

If a nonjudicial foreclosure process is used, your mortgage company will have to file a separate lawsuit to collect on the deficiency balance. This lawsuit is similar to a credit card debt collection lawsuit or a lawsuit for a deficiency on a car loan. It can be difficult to defend yourself in secured debt collection lawsuits. But you can consider presenting defenses such as a violation of the statute of limitations, challenges under the Fair Debt Collection Practices Act (FDCPA), or lender fraud.

Defenses

If the mortgage company waits too long after the foreclosure, collection of the deficiency balance could be time-barred. Statutes of limitations forbid collection lawsuits where the required amount of time has already passed. The FDCPA may be grounds for a countersuit where a debt collector is involved. Countersuits allow you to sue the party that sued you. Usually, a successful countersuit based on the FDCPA would only reduce your deficiency balance. In some cases, an FDCPA countersuit may result in a debt collector owing you money.

How Does the Mortgage Company Collect a Deficiency Judgment?

When a mortgage company gets a deficiency judgment in court, it's free to collect against you in various ways.

Garnishment

Like any other creditor with a judgment, a mortgage company can garnish your wages. When your employer receives a wage garnishment order, they must make the withdrawals from your paycheck. If your employer doesn't make the required withdrawals, they may face legal consequences. For this reason, it's a terrible idea to ask your employer not to make the required withdrawals.

It's important to understand that creditors can't take your entire paycheck. Federal law limits garnishments to a maximum of 25% of your disposable income. The maximum level is lower than 25% for individuals who don’t earn much income. 

Bank Account Levy

Creditors that have judgments against you can levy your bank account. A levy functions like garnishment, except that your creditor takes money out of your bank account instead of your paycheck to repay your balance. Unlike garnishment, there isn't a federal limit on the percentage that a creditor can take from your bank account. They can take all the money you have. Your bank will also charge a fee for taking your money.

Thankfully, most states have personal property exemptions you can use to protect your bank account. The amount you can claim as exempt depends on your state's law. State laws vary greatly on this issue. Claiming the exemption may allow you to get some or all the seized money back. Yet, this can take time.

Personal Property Lien

Another method of collecting that any creditor with a judgment may use is a lien. When a lien is placed on your property, such as your car or house, you can't sell that property without first paying off the lien. Judgment liens generally attach to all of your property, yet they are most useful with property such as houses or cars that require title transfers, as opposed to less valuable personal property. It’s possible the mortgage company will take your property to satisfy the judgment. This is very unusual because it’s usually less expensive to wait for you to sell the property.

Will a Bankruptcy Stop the Collection of a Deficiency Judgment?

Bankruptcy can wipe out a deficiency judgment unless that judgment is classified as a secured debt. You may be wondering, how could the debt tied to a foreclosure sale be secured? The collateral was your house and it has already been sold. Yet, if the mortgage company records their deficiency judgment in your county's records office, that judgment becomes a judicial lien. A judicial lien makes your creditor’s judgment secured, even though you are no longer in possession of your original collateral. Instead, the collateral becomes any non-exempt equity in any property to which you retain ownership rights.

If the deficiency judgment hasn't occurred yet or the judgment hasn't been recorded, you can discharge the deficiency in a Chapter 7 bankruptcy since it will be classified as unsecured debt. 

If the mortgage company issues a Form 1099 to you for forgiving a deficiency debt, regardless of which chapter of bankruptcy you file under, the IRS will not be able to treat it as income. This can save you a great deal of potential tax debt.

Let's Summarize...

After a foreclosure, a mortgage company can pursue you for the difference in the proceeds of the sale of your home and the remaining balance. They can use all the collection techniques that other creditors use. They can garnish your wages, levy your bank account, or place a lien on things you own.

If you're struggling to navigate this situation, bankruptcy may be a good option for you. If your bankruptcy is a straightforward case, you may be able to file your own Chapter 7 bankruptcy without hiring a bankruptcy attorney. Upsolve has a free tool that helps people file their own Chapter 7 bankruptcy. With more complicated cases, you should hire an experienced bankruptcy attorney in your area.